China has announced the launch of a new initiative that is likely to liberalize the process for foreign investors to invest in the China bond market. As the third largest bond market in the world, this could be a significant boost to international investors wanting access to the Mainland China debt market.
On 15 March 2017, following the fifth annual meeting of the 12th National People' Congress, Premier Li Keqiang announced the intention to launch a bond trading link between China and Hong Kong (the "Bond Connect") by the end of 2017. The Bond Connect will allow foreign investors to invest in bonds traded in Mainland China directly through Hong Kong without the need to comply with a number of onshore procedures and formalities that are currently in place. However, the announcement is silent on what will be on offer for the China-to-Hong Kong trading link.
Bond Connect is consistent with a number of other measures that have been introduced to liberalize China's capital markets in recent years, notably the establishment of the Shanghai-Hong Kong Stock Connect in November 2014 and the Shenzhen-Hong Kong Stock Connect in December 2016, the opening up the China Interbank Bond Market (the "CIBM") to eligible foreign institutional investors in February 2016 by the People's Bank of China (the "PBOC Scheme"), and the State Administration of Foreign Exchange allowing foreign investors to access the onshore foreign exchange derivatives market for hedging of bond positions in February 2017.
At present, bonds in China are traded on the CIBM and the domestic stock exchanges, with the CIBM capturing the lion's share of the bond market.
Institutional investors may invest in bonds traded in Mainland China through the Qualified Foreign Institutional Investor scheme and the Renminbi Foreign Institutional Investor scheme (for both CIBM and exchange-traded bonds) and through the PBOC Scheme (for CIBM traded bonds). Each of these schemes require the opening of accounts and compliance with certain procedures onshore in Mainland China.
We expect that the launch of the Bond Connect will significantly simplify the process required for foreign investors for investing in the China bond market, which in particular will provide convenience to investors without significant presence in China and Hong Kong.
The Bond Connect signifies China's continued commitment to opening up of its capital markets and enhancing interconnectivity with the Hong Kong market.