China Fixed Income 2022 highlights: “Off to a good start, dim sum bonds are likely to perform even better next year” – Stanley Chan, HKMA

Dim sum bonds will continue to attract global investors over the course of 2023. At FA’s recent China Fixed Income event, Stanley Chan discussed the success of Bond Connect to date.

“The Bond Connect initiative is likely to witness increased activity through 2023,” revealed an audience poll conducted at last week’s China Fixed Income Summit in Hong Kong.

Mirroring the observations of Stanley Chan, head of the Payment Systems Operation Division at the Hong Kong Monetary Authority (HKMA) and CEO of Hong Kong FMI Services, the interactive poll suggested that both the Northbound and Southbound trading channels of the Bond Connect scheme will experience increased trade flows in 2023.

The cross-border investment initiative provides mainland Chinese and Hong Kong-based investors access to the fixed income instruments on offer in their respective markets.

While the Northbound branch opened international access to China’s onshore bond market in 2017, the Southbound channel, which offers mainland investors access to renminbi-denominated Hong Kong-based issuance, or “dim sum bonds”, was established more recently, in September 2021.

“It has performed much better than expected,” Chan said, referring to the Southbound channel. So far, the route facilitated trade for 40 financial institutions, offering access to over RMB340 billion (approximately $48.9 million) in issuance, he shared.

Chan elaborated on how best to access the scheme. “There are two routes: via custodian banks, or via central securities depository (CSD) linkage between the Central Moneymarkets Unit (CMU) of the HKMA and the Shanghai Clearing House.”

“The holding in Southbound under the CSD link is approaching its annual quota of RMB500 billion, and we still see strong interest. The scheme will be (even) more successful next year.”

Offer of liquidity

The early success of the Southbound initiative demonstrates rising interest among global investors for dim sum bonds. Chan attributed this to the scheme’s capacity to offer liquidity and competitive rates.

“The market window has enabled issuers to get cheap funding through dim sum bond issuance. The regular issuance of The Ministry of Finance of the People's Republic of China (CMOF) bonds in Hong Kong, and the People’s Bank of China (PBOC) bills have provided a good reference yield curve for issuers.” He added that such issuance has attracted the attention of international financial institutions, as well as Chinese public bodies such as those based in Hainan and Shenzhen.

However, he noted that Southbound performance is dependent on several factors, including sustained investor interest and a favourable interest rate regime. So far, dim sum bonds have benefitted from substantial interest rate rises in the US, he noted.

But Chan remains optimistic about continued momentum. “We will see continuous interest from the investor side. If you consider the fundamentals of dim sum bonds, we see a pool of funds investing and an increasing awareness among issuers.”

During the discussion, Chan touched on potential amendments to improve and expand the scheme further. He proposed the introduction of more effective hedging vehicles, and noted how product development could better cater to overseas investors drawing on renminbi bonds or assets.

“We are working together with the PBOC to explore the best timing to launch different products to satisfy international investor demand and appetite.”

 Asked about other regulatory initiatives likely to impact Bond Connect, Chan pointed to some of the progress taking place on the southbound side, including product diversification, raising the awareness level among mainland investors, and expanding the group of eligible investors.

 “It is a young scheme and it isn’t static,” he concluded.

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