China to allow onshore bond buying via Hong Kong this year

[SHANGHAI] China will allow investors to buy mainland bonds in Hong Kong this year, Premier Li Keqiang said at a briefing Wednesday, adding to recent moves to ease access to the nation's debt market.

Policy makers will allow overseas funds to buy onshore bonds in transactions carried out in Hong Kong, Mr Li said Wednesday at a press conference in Beijing after the close of the annual National People's Congress. He didn't provide further details.

"This is what the country needs, and Hong Kong has the platform," Mr Li said.

The comments signal the latest push by mainland authorities to make China's bonds more accessible to offshore investors.

Foreign institutions that invest in the interbank debt market can trade products including forwards, swaps, cross-currency swaps and options with domestic settlement agents, the State Administration of Foreign Exchange said in a statement posted on its website on Feb 27.

"The opening of the onshore bond market is the big story for this year," said Tommy Xie, an economist at Overseas-Chinese Banking Corporation in Singapore.

"This bond connect is part of this story. It will give more channels to offshore investors. The current foreign holdings are still very low."

The system would allow offshore investors to trade China's interbank bond market, Patrick Pang, managing director at Asia Securities Industry and Financial Markets Association in Hong Kong said, citing market participants.

HKEX and China Foreign Exchange Trade System are building a bond trading platform, said Mr Pang, whose organisation's members include major banks and asset managers. Whether investors use the platform will depend on liquidity, among other issues, he said.

Hong Kong Exchanges and Clearing Ltd, said in a statement it welcomed Mr Li's announcement, and that it was progressing with preparatory work on the bond trading system.

The People's Bank of China opened the interbank bond market to institutional investors last year. While Mr Li didn't provide details, observers expect the Hong Kong link will allow access to both institutional and retail participants.

"That will be a channel mostly for retail investors, on top of the access for most institutional investors," said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA.

"Retail flows are likely to be tiny, especially compared with the sheer size of the onshore market capitalisation, but any extra channel would help promote the onshore market."

Ms Cheung compared the possible evolution of a bond link to the Qualified Foreign Institutional Investor program, which initially only granted access to Chinese exchange-traded securities, but was expanded to include other markets.

A bond-trading link between the former British colony and the mainland is part of Hong Kong Exchanges & Clearing Ltd's strategic plan.

"We will explore the creation of a 'bond connect' scheme to provide cross-border cash bond trading and settlement connectivity with China's major onshore bond market infrastructures, with a focus on the institutional bond market," the plan said.

HKEX has two existing links with mainland markets, the stock connects with bourses in Shanghai and Shenzhen, though it's unclear what shape a bond link will take. Shares of HKEX rose as much as 1.6 per cent after Mr Li's comments.

"The bond connect should bring more foreign capital into the bond market, which would help the onshore bond market to stabilise," said Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank Co.

"But we are not sure how the link will work and how big the foreign inflows can be."

BLOOMBERG