The Bond Connect program linking the mainland and Hong Kong bond markets has largely facilitated the outbound reach of Chinese investors and addressed the increasing investment appetite of foreign ones, demonstrating the nation's continued efforts to advance two-way opening-up in the financial sector, said experts.
The comments came on the seventh anniversary of the Bond Connect program on Wednesday.
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Launched in July 2017, the program makes the Chinese mainland's interbank bond market accessible to overseas investors and international bond markets for Chinese mainland investors.
Up to 821 international investors have entered the Chinese mainland bond market via the program's northbound leg, according to Bond Connect Company Ltd, the management entity of the program.
The average daily trading value of the program's northbound leg was 46.6 billion yuan ($6.4 billion) in May, up from 2.2 billion yuan in 2017.
While the northbound leg of the Bond Connect program has provided a convenient channel for foreign investors, the liquidity of the Chinese onshore bond market has improved amid the increasing participation of foreign investors. This will help lower financing costs for Chinese companies, said Freddy Wong, head of the fixed income department at Invesco Asia-Pacific.
As of the end of April, foreign institutions held 4.1 trillion yuan of Chinese bonds, a 248 percent jump from the end of 2017, according to the People's Bank of China, the country's central bank.
Meanwhile, foreign investors have increased their holdings of China's bonds for eight consecutive months, with a cumulative increase of more than 850 billion yuan. The cumulative issuance value of panda bonds or yuan-denominated bonds issued by overseas institutions in the Chinese onshore market has topped 850 billion yuan by April, up 280 percent from the close of 2017.
Apart from the increasing trading value, the investable product portfolio under Bond Connect has been expanding, including government bonds, policy bank bonds, interbank certificates of deposit, credit bonds such as short-term financing bonds and medium-term notes, as well as asset-backed securities, said Wong.
While only bond trading in the secondary market was made available to overseas investors at the very beginning, progress has been made by opening primary market services, foreign exchange trading and launching derivatives trading-based Swap Connect one year ago, he added.
The southbound leg, which has been connecting Chinese mainland investors with overseas bond markets since September 2021, has seen 865 bonds held in custody by the end of May, up from only 35 three years ago. The balance of bonds in custody also jumped from 5.5 billion yuan in 2021 to over 442 billion yuan in end May.
The Bond Connect program has accelerated China's inclusion in the major bond indexes such as the Bloomberg Barclays Global Aggregate Index, JPMorgan's Government Bond Index-Emerging Markets Index and FTSE World Government Bond Index since 2019, said Ming Ming, chief economist of CITIC Securities.
But government bonds and policy bank bonds make up most of the foreign investor holdings in the Chinese onshore market at present, Ming said. However, corporate bonds form the major chunk of bond trading at the exchange level. In this sense, there is room for an increase in foreign investors' presence in corporate bond trading, he said.
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Ming also anticipates further expansion in terms of investment quotas, product portfolios and investment feasibility at the southbound leg.
The PBOC's Financial Market Department wrote in a circular released on June 21 that the high-standard opening-up of the Chinese bond market will be advanced, which includes improving the bond and swap connectivity programs and enriching derivatives related to interest rates and foreign exchange rates.
Efforts will be made to explore a mechanism under which RMB bonds can be used as qualified offshore collaterals. The investment and financing environment will be further improved to attract more international issuers and long-term investors, said department officials.
