Deutsche Bank, BNP Paribas and HSBC are among the first lot of banks to facilitate trading through China’s Bond Connect programme which went live on Monday.
The new programme is designed to give international investors ‘northbound’ access to mainland China’s RMB 69 trillion ($10 trillion) interbank bond market.
Deutsche Bank said it had executed its first two transactions leveraging the initiative, as did HSBC and BNP Paribas as market makers.
“By broadening the investor pool to attract more foreign investment, we believe China should improve the quality of its debt markets, as well as generate cash inflows that will help with Beijing’s battle to stem capital outflows,” said CG Lai, head of global markets for China at BNP Paribas.
HSBC also stated it will act as an underwriter for the Agricultural Development Bank of China in its first public issues of policy financial bonds to both domestic and overseas investors.
“Despite China being the world’s third-largest bond market, overseas investors currently own less than two per cent of it,” said Helen Wong, chief executive for Greater China at HSBC.
“The enhanced ease of investment under Bond Connect will attract more overseas funds, creating a more diversified investor base and further enhancing the market’s size and depth,” said Wong.
It is anticipated the initiative will act as the next major phase in China’s financial market liberalisation. BNP Paribas expects the programme, along with other related reforms, to boost foreign holdings of Chinese bonds from 2% to 10%.
Working alongside the Direct China Interbank Bond Market (CIBM), and its other routes for offshore investing, Bond Connect enables investors to conduct trading a settlement through a single offshore platform.
Chinese regulators have also shown greater flexibility in adopting international standards, with foreign investors being allowed to settle bond transactions on a T+2 basis, on top of the original T+0 and T+1 arrangement.
An analyst report from DBS Bank stated the structure of Bond Connect is similar to that of China’s existing Stock Connect schemes, but would also grant access to the onshore FX market.
A note from Goldman Sachs seen by Global Custodian called the Bond Connect programme an “important milestone in opening up China’s domestic bond market.”
The note also added there could be more than $1 trillion of additional global fixed income investments to be allocated to China domestic bonds over the next decade.
Research by Standard Chartered also estimates foreign holdings of onshore bonds will increase by CNY 100 billion to reach CNY 950 billion by year-end as a result of Bond Connect.
However, DBS noted the initial inflow is expected to be limited due to “investors’ concerns of liquidity and capital controls.” Longer term, it would be crucial to consolidate the new bond link with other existing investment schemes... to improve market efficiency.”
The move could further boost the Shenzhen Hong Kong Stock Connect trading link which was launched at the end of last year, alongside the existing Shanghai trading link. China’s A-Shares were also included in the MSCI Emerging Markets Index last month following a number of failed attempts in recent years.