Early today, China opened up its $10 trillion bond market to foreign investors, in the latest liberalisation move by Beijing as it seeks to draw in more fund flows as it battles slowing economic growth.
The new conduit comes via Hong Kong, where “qualified investors” will be able to buy debt in China — the world’s third-largest bond market after the United States and Japan.
Qualified investors include central banks, sovereign wealth funds, and other major financial institutions, according to the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority, who jointly announced the platform on Sunday.
Their statement said the “bond connect” arrangement between the Hong Kong and mainland Chinese markets went into “experimental operation” from Monday.
The announcement came on a weekend in which Hong Kong and China marked the 20th anniversary of Britain’s handover of the southern Chinese financial centre back to Beijing in 1997.
“The bond connect is an important move for the central government to support Hong Kong’s development and promote cooperation between the mainland and Hong Kong,” the PBoC said Monday.
It will “promote Hong Kong’s long-term prosperity and stability and provide a more convenient investment channel for overseas investors. It will also steadily push forward the opening up of China’s financial market”.
The growing Chinese bond market has been virtually out of reach for foreign investors, who currently hold less than 1.5 percent of bonds issued in China, according to estimates by Bloomberg.
The new platform mirrors previously established link-ups between the share markets of Hong Kong and mainland China that now allow foreign and Chinese investors to buy shares in the each other’s markets.
Those links give foreigners some access to China-listed shares, while also allowing Chinese firms to buy Hong Kong-traded stocks.
The new bond connect scheme, however, currently only allows foreign investors to buy Chinese debt.
HSBC said it completed its first deal under the new arrangement as underwriter for a bond issue by Agricultural Development Bank of China.
“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,” Helen Wong, HSBC Greater China Chief Executive, said in a statement.
“This will help pave the way for China bonds to be included in major global bond indices in the future.”
China has for years faced foreign complaints about restricted access to its markets, but has recently made a series of liberalisation pledges partly to expand its global market influence.
Last month, leading index compiler MSCI said it would include Chinese shares in its global emerging-market indices, citing loosening restrictions on foreign ownership of Chinese stocks.
After years of runaway growth, China is grappling with slowing economic expansion, and has moved to stanch massive capital flight by Chinese funds seeking better returns overseas while trying to lure more foreign investment.
Utilisation of the new bond connect platform, however, could hinge on fears of mounting Chinese debt levels which have prompted warnings of a looming crisis and possible defaults. China has moved aggressively in recent months to rein in runaway credit.