The People’s Bank of China announced on Tuesday it will allow offshore investors to use onshore bonds issued by the Ministry of Finance and Chinese mainland policy banks and held under the Northbound Bond Connect as margin collateral for Northbound Swap Connect transactions.
The new initiative will fortify the development of the nation’s onshore bond market and propel renminbi internationalization, the mainland and Hong Kong financial regulators said.
ALSO READ: Bond Connect cements mainland bond market’s development
The announcement was made at a summit, held at Exchange Square in Hong Kong, which marked the seventh anniversary of Bond Connect’s launch.
More than 800 investors covering 40 jurisdictions have participated in the Bond Connect this year, with an average daily trading volume of 44 billion yuan ($6.05 billion) — 20 times the amount when the program kicked off in 2017, and an average annual growth rate of 63% in the past seven years.
Zhang Yi, President of the China Foreign Exchange Trade System
Hong Kong’s Securities and Futures Commission and the Hong Kong Monetary Authority welcomed the initiative, saying they will guide infrastructure institutions, including OTC Clearing Hong Kong and the HKMA Central Moneymarkets Unit, in preparing for its implementation.
READ MORE: Swap Connect enhancements boost domestic bond market, yuan internationalization
Jiang Huifen, deputy director general of the PBOC’s Financial Market Department, said in a recorded video: “This new margin collateral initiative will provide Northbound Swap Connect investors with an additional choice of cashless collateral, reduce liquidity cost and improve capital efficiency.
It will also vitalize offshore investors’ onshore bond holdings and promote synergies between the Bond Connect and the Swap Connect.” “More than 800 investors covering 40 jurisdictions have participated in the Bond Connect this year, with an average daily trading volume of 44 billion yuan ($6.05 billion) — 20 times the amount when the program kicked off in 2017, and an average annual growth rate of 63 percent in the past seven years,” said Zhang Yi, president of the China Foreign Exchange Trade System (National Interbank Funding Center).
Since the Northbound Bond Connect came into operation, cumulative net inflows have exceeded 2 trillion yuan, compared to the scale of capital inflows of the two stock connect programs, while northbound net inflows of 1.8 trillion yuan have been recorded.
Zhang, who also chairs Bond Connect Co, told the summit that since the launch of Swap Connect last year, it has attracted 61 overseas institutions to the market, and more than 4,300 transactions have been completed, with a total notional principal amount of about 2.2 trillion yuan, while the average daily transaction volume has gone up several times.
READ MORE: Market sees moves to stabilize yuan
Hong Kong Financial Secretary Paul Chan Mo-po said the Bond Connect has become a major channel for overseas investors in allocating mainland onshore bonds. “The trading volume of the Northbound Bond Connect has been growing, from an average of 1.5 billion yuan per day in the first month of its launch to an average of about 46.6 billion yuan daily in May this year — a 30-fold increase,” Chan said.
“Last year, the total transaction volume of international investors investing in mainland bonds exceeded 15 trillion yuan, about two-thirds of which were conducted through the Bond Connect.”
SFC Chief Executive Officer Julia Leung Fung-yee noted that the scale of the mainland bond market has expanded almost four-fold from a decade ago, and now ranks as the world’s second-largest bond market after the United States.
READ MORE: Bond Connect helping investors
“The mainland’s bond market still has strong development potential. Its size is approximately 1.1 times that of the nation’s gross domestic product, which is lower than that of developed economies. And the total value of renminbi domestic bonds held by foreign financial institutions account for only about 3 percent,” she said.
Eddie Yue Wai-man, chief executive of the HKMA, said that as more mainland investors allocate overseas bond assets through the Southbound Bond Connect, the program has become an important driving force for the development of the special administrative region’s offshore renminbi bond market.
“The total amount of renminbi-denominated bonds, including certificates of deposit, issued in Hong Kong last year, reached 540 billion yuan — an increase of 3.5 times, compared with 2020. The HKMA added nine new designated market makers in September last year, further promoting the liquidity of the secondary market and better meeting the needs of investors,” Yue said in a recorded video.
Hong Kong Exchanges and Clearing Chief Executive Officer Bonnie Chan Yi-ting also said in a recorded video that the Hong Kong Stock Exchange is preparing to launch a 10-year Treasury bond futures contract product to help foreign investors manage interest-rate risks when investing in mainland onshore bonds.
