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Tuesday, November 29, 2016, 22:45

Bonds ‘through train’ next on the table

By Luo Weiteng
Bonds ‘through train’ next on the table
The Shenzhen Stock Exchange building (center) will be the focus of trading activity for investors when the second cross-boundary stock connect between Hong Kong and the Chinese mainland kicks off on Monday. The new stocks “through train” has given rise to plans for the setting up of a bonds trading link to allow investors on both sides, as well as those overseas, to tap into the mainland’s massive bonds market — the third-largest worldwide. (Shen Qilai / Bloomberg)

Hong Kong is mulling the possibility of a bonds-trading link with the Chinese mainland, betting on strengthening cross-boundary “bonds”, underpinned by the upcoming Shenzhen-Hong Kong Stock Connect, which will kick off on Monday.

In a report released on Tuesday, the Financial Services Development Council (FSDC) spoke of a proposed “through train” connecting the Hong Kong and mainland bond markets.

The plan comes on the heels of last week’s announcement that the long-anticipated second stocks “through train” between the SAR and the mainland — the Shenzhen-Hong Kong Stock Connect — will be launched on Dec 5.

If the proposal materializes, it would mark yet another step forward by the world’s second-largest economy in opening up its financial markets.

George Leung Siu-kay — a member of the FSDC’s Opportunities Committee and an Asia-Pacific advisor for HSBC — believed that a bonds connect is “a matter of investment option” as investors have long been beset by limited investment channels between the cross-boundary bond markets.

Mainland investors are allowed to invest in offshore stock and bond markets under the Qualified Domestic Institutional Investor (QDII) program and the Mainland-Hong Kong Mutual Recognition of Funds initiative.

However, as of the first half of the year, debt funds only accounted for no more than 3 percent of the existing US$90-billion QDII quotas.

Although it has been a year since Beijing approved the sale of investment products by Hong Kong funds on the mainland, only six such funds have so far been given the green light following two rounds of review by the China Securities Regulatory Commission. According to the FSDC, merely two of these funds are used for investing in fixed-income products.

Currently, the mainland’s bond market is the third-largest globally, with an US$8.7-trillion depository balance, but it remains closed to the outside world and is dominated by institutional investors, Leung noted.

He said this is where a bonds link could come in by offering more choices for cross-boundary retail investors, thus pushing for the further opening-up of the country’s capital market and increasing liquidity in Hong Kong’s bond market as well.

Things like a stock connect or a bonds connect are always good ideas. With mainland capital markets tuned to opening up further, undoubtedly, we’re going to see more such links on the way

Jacob Zhou, Hong Kong-based analyst with one of the “Big Four” accounting firms

With the two cross-boundary stock connects serving as prime examples, FSDC senior advisor Esmond Lee believed that Hong Kong and the mainland are well-prepared for a bonds-trading link in terms of technology, infrastructure build-up and operational management.

For exchange-traded bonds, the SAR government body suggested the adoption of the prototype of the Stock Connect, while for over-the-counter-traded bonds, which are the mainstay of the Hong Kong and mainland bond markets, a “bonds connect” account with a designated bank would be necessary.

A “bonds connect” account could also help trace cross-boundary capital investments in the Hong Kong and mainland bond markets, as it’s always not easy for over-the-counter-traded bonds to be repatriated to their origins after the sale of cross-boundary bond investments.

Lee said this is particularly true with the yuan’s continued depreciation having triggered a fresh bout of interest in offshore bonds among mainland investors.

Leung shrugged off worries that a weakening yuan may dampen investors’ enthusiasm in mainland bonds, saying that fixed-income products will always have a role to play in diversifying investors’ portfolios and reducing their risk exposure.

Jacob Zhou, a Hong Kong-based analyst with one of the “Big Four” accounting firms, told China Daily he doesn’t think that capital outflow pressures would make mainland regulators eschew a cross-boundary bonds connect.

“The point is that it’s always better to offer some regulated channels for people to invest overseas rather than to allow money to flow out of the boundary through unregulated ways.

“Things like a stock connect or a bonds connect are always good ideas. With mainland capital markets tuned to opening up further, undoubtedly, we’re going to see more such links on the way,” Zhou said.
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