HONG KONG -- Chinese investors will have a new channel to trade in offshore debt starting next week, in the latest move to open the financial system of the world's second-largest economy.
The so-called southbound Bond Connect program debuts Sept. 24, letting mainland investors buy and sell notes tradable in Hong Kong, according to the Hong Kong Monetary Authority (HKMA). The long-awaited program completes the loop with a similar Hong Kong-mainland link that opened in 2017 and gave global investors access to China's $17.5 trillion bond market.
The announcement, which entrenches Hong Kong's role as China's financial gateway, comes a week after the opening of the Wealth Management Connect program expected to bring tens of billions of dollars of mainland household savings into the city. It also expands the broader connect program, which launched in 2014 when the Shanghai and Hong Kong stock markets were linked. Shenzhen and Hong Kong's stock markets are also now linked.
"Southbound [bond] trading will deepen the two-way opening up of the mainland financial markets and promote the vibrant development of the Hong Kong bond market, thereby consolidating Hong Kong's status as an international financial center," said Eddie Yue, chief executive of the HKMA, Hong Kong's de facto central bank.
As many as 2,733 global institutional investors have been approved to use the northbound link to access China's bond market since it opened. The link boasts an average turnover of 26.3 billion yuan ($4.08 billion) per day, Yue said.
The addition of the southbound link opens another avenue for fund outflows, something that could limit the yuan's recent rapid rise.
Previously, mainland investors could trade in offshore bonds only through the Qualified Domestic Institutional Investor quota, which was raised to a record $147 billion in June, the seventh increase since September 2020.
"Allocating to offshore Chinese bonds, especially high-yield bonds, will help increase portfolio returns and reduce volatility of overall net asset value through low correlation, without sacrificing liquidity," said Alvin Cheng, fixed income portfolio manager at Fidelity International.
Investors eligible to use the southbound link include a selected number of primary dealers for open market operations, as approved by China's central bank, and qualified Chinese institutional investors, the HKMA said. Such investors should deal with market makers designated by the HKMA.
The primary dealers will be subject to an annual quota of 500 billion yuan and a daily limit of 20 billion yuan.
HSBC Holdings, whose China unit is one of the primary dealers approved by the People's Bank of China, said it was in "full swing to prepare for the launch." The company said the program will accelerate the development of Hong Kong's bond markets and attract "more global bond issuers" to the city.
Standard Chartered said its teams in mainland China and Hong Kong are well "prepared" for the southbound launch.