China will allow foreign investors to buy onshore bonds via Hong Kong this year, Premier Li Keqiang said at a press conference in Beijing after the close of the annual National People’s Congress.
The bond connect program is an extension of the existing stock links with Shanghai and Shenzhen. I believe it would also cement Hong Kong’s status as China’s major offshore renminbi hub and offshore financial center.
Hong Kong offers a limited number of renminbi bonds, and local investors have little interest in bond products. But global investors have great interest in renminbi products. Therefore, the bond connect program will enhance Hong Kong’s role as a financial intermediary.
The program will enrich the bond offerings in Hong Kong, as well as attract fund inflows into the offshore yuan liquidity pool. It would offer a relatively safe and highly liquid place for investors to park their offshore yuan capital.
The bond connect program may only cover sovereign bonds, bonds issued by large corporates, or listed bond offered by reliable issuers with high credit ratings, given that offshore investors are not too familiar with China’s onshore bond market.
China’s bond market is worth about 63.7 trillion yuan (US$9.21 trillion), making it the world’s third largest bond market. Foreign investors have shown increasing demand for renminbi bonds as the Chinese currency has joined the SDR basket.
At present, foreign investors hold less than 2 percent of onshore bonds, so there is vast growth potential.
This article appeared in the Hong Kong Economic Journal on Mar. 20
Translation by Julie Zhu
[Chinese version 中文版]
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