Chinese and Hong Kong regulators took a step forward in their plans to launch a Bond Connect scheme this week, announcing that the mainland and Hong Kong-based clearing houses that would provide trading infrastructure for the scheme.
But although the news got plenty of attention, Bond Connect is unlikely to be greeted with unabated excitement by major fund houses. For one thing, there are still plenty of questions about how the scheme will work.
Barnaby Nelson, head of investors and intermediaries for Northeast Asia at Standard Chartered, said potential users of the link had raised questions about which types of investors will be eligible to participate, and quite how the onboarding process and know-your-customer (KYC) requirements will be.
“We expect more clarity by the end of next week,” he said.
Bond Connect raises more issues than its equity equivalent, said Mark Austen, chief executive of the Asia Securities Industry & Financial Markets Association (Asifma), at Thomson Reuters' buy-side summit in Hong Kong on Wednesday.
For example, the Hong Kong Stock Exchange — which will operate the Hong Kong side of the link — has no bond platform. What’s more, investors face KYC requirements when it comes to bonds but not equities, he added, echoing a point made by Nelson.
This raises concerns among international investors about whether the system will run smoothly — and also how expensive it will, said Austen. Another concern of investors is how Bond Connect will work together with the existing channels to provide debt market access.
The scheme is, in many ways, still in its early stages. Although Bond Connect has been given official approval by the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority on Tuesday, there has still been no date set for the launch.
Northbound trading – investment into Chinese bonds – will start first and may not be subject to a quota, said Chinese investment bank CICC in a report. Southbound trading will be explored in due course.
There are plenty of questions, then, that need to be answered. But even when they do, the region’s bigger funds may decide Bond Connect is not for them.
Take your pick
Large institutions will see scheme as inferior to other channels, said Standard Chartered’s Nelson. These options include direct access to China’s interbank bond market (CIBM), the qualified foreign institutional investor (QFII) scheme and its renminbi equivalent (RQFII).
There are several problems with Bond Connect, Nelson said. It has no onshore renminbi (CNY) exposure, so investors are exposed to short-term spikes in Hong Kong offshore renminbi (CNH) spreads; no access to CNY onshore hedging using currency derivatives; and no access to the China government bond primary market or bond auctions.
This does not mean the Bond Connect is not needed. It will appeal to smaller investors who want quick access to Chinese bonds, said Nelson, and they will be able to use a broker or custodian in Hong Kong to that end. Larger players are, in any case, likely already using other channels to trade renminbi debt, he noted.
David Li, Hong Kong chief executive of Caceis, the asset servicing arm of French bank Credit Agricole, agreed. Bond Connect seems to offer an easier process for accessing the CIBM, he told AsianInvestor, so it could appeal to investors who are not using the existing channels.
That said, the approval of Bond Connect looks to have come at a good time for investors. Onshore bond yields have moved meaningfully higher recently, said Gregory Suen, Hong Kong-based investment director of fixed income at HSBC Global Asset Management.
The 10-year Chinese government bond yield has risen to 3.65% as of May 18 from 3.303% on April 2, according to Investing.com.
As of end March, China’s bond market stood at Rmb65.9 trillion ($9.57 trillion) in terms of outstandings. There are 473 overseas investors in the market, with outstanding assets of around Rmb800 billion, according to PBoC data.
This an edited version of a story that originally appeared on Asian Investor.