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HONG Kong and China on Monday further opened up the mainland's US$10 trillion bond market to foreign investors through the launch of the long-anticipated Bond Connect platform, which had an aggregate trading volume of 7.05 billion yuan (S$1.43 billion) on its first day.
The People's Bank of China and Hong Kong Monetary Authority said in a joint statement on Sunday that the platform is now functioning under "trial operation", starting with only "northbound trading" in the mainland bond market, the world's third-largest bond market after the United States and Japan.
Launched less than two months after the initial official announcement in May so as to coincide with the 20th anniversary of Hong Kong's handover to China celebrated over the weekend, Bond Connect allows "qualified investors" such as central banks, sovereign wealth funds and other major financial institutions to buy debt in China.
There will be no quota for such investments, unlike restrictions for the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, launched in 2014 and 2016, respectively.
Some 20 onshore institutions, including the Bank of China, have submitted applications to become Bond Connect participating dealers providing quotations to the first batch of about 130 institutional offshore participants.
Analysts have hailed the Bond Connect as a big step in the liberalisation of the mainland's capital markets.
"It is a milestone in the internationalisation of the RMB because it will greatly enlarge the pool of investable assets denominated in RMB as global investors will be able to hold and trade more RMB-denominated assets," said Ivan Chung, associate managing director of Greater China credit research and analysis at Moody's.
"In the next 12 months, we expect that northbound inflows to the onshore bond market will grow gradually... We expect more international bond indices will include or increase allocations in Chinese onshore bonds one year after the implementation of Bond Connect."
The eventual inclusion of onshore bonds in global bond indices could facilitate an estimated inflow of between US$200 billion and US$250 billion into the China bond market, said Justin Chan, co-head of global markets (Asia-Pacific) at HSBC.
Mr Chan expects trading volume to pick up gradually to match or surpass that of existing avenues to access Chinese bonds for international investors, who currently hold less than 1.5 per cent of anything issued in China, according to Bloomberg estimates.
According to Chinese state news agency Xinhua, a total of 473 overseas investors currently hold 800 billion yuan of outstanding investment in the Chinese interbank bond market under several schemes, including Qualified Foreign Institutional Investor and RMB Qualified Foreign Institutional Investor, introduced in 2002 and 2011, respectively.
While northbound Bond Connect trade has begun, Hong Kong will "explore the southbound trading in due course", said the city's newly-inaugurated Chief Executive Carrie Lam. Chief executive of Hong Kong Exchanges and Clearing, Charles Li, said demand for a southbound channel is currently limited.
That is partly because Hong Kong does not have a big bond market, said Terence Chong, executive director of the Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong.
"Even as a financial centre, we do not have a lot of financial products, and (we) especially lack bond products due to historical reasons," he said.
"We don't need money, we have a surplus every year, so the Hong Kong government doesn't issue bonds. Companies raise money via banks, so they also don't usually issue bonds."