The opening up of China’s capital market is expected to usher in another important milestone: on the 4th anniversary of the launch of Northbound Bond Connect, on September 15, the People’s Bank of China and the Hong Kong Monetary Authority issued a joint announcement stating that Bond Connect is “Southbound”. Will be launched on September 24.
On the same day, the Shanghai Clearing House issued the “Implementation Rules for the Mainland and Hong Kong Bond Market Connectivity Southbound Cooperation Business” and the “Mainland and Hong Kong Bond Market Connectivity Southbound Cooperation Business Guide “. Chinamoney.com published an announcement on the “Southbound Trading Rules for the National Interbank Funding Center Bond Connect”, stating that the “Southbound Trading” trading service day is the trading day of the mainland interbank bond market, and the trading service hours are for mainland banks. Inter-bond market transaction time.
What is “Southward Link”?
The so-called “Southbound Link” of Bond Connect refers to the mechanism by which mainland institutional investors connect with Hong Kong’s basic service institutions to invest in the Hong Kong bond market arrange.
According to the central bank, at present, the annual total quota of “South Link” is 500 billion yuan equivalent, and the daily quota is 20 billion yuan equivalent. The People’s Bank of China adjusts the annual total quota and daily quota of “Southbound Link” in accordance with the situation of cross-border capital flows.
In July 2017, the “Northbound Link” for foreign institutions to invest in the inter-bank bond market was opened first. Since the opening, it has been operating steadily and is compatible with other investment channels into the mainland bond market. Formation of complementarity, and “Southbound Link” will further improve the two-way opening of the bond market.
Hang Seng Bank China Chief Economist Wang Dan pointed out in a news article that the “Northbound Link” of Bond Connect was launched in 2017, allowing all foreign capital to enter the inter-bank bond market. Today, the number of foreign holdings of Chinese bonds has reached four times that of 2017. The scale of China’s bond market exceeds 125 trillion yuan, ranking second in the world after the United States. As of the end of 2020, foreign capital controls 2.8% of the bond market. Although it has increased significantly from 1.3% in 2017, as the pace of financial opening accelerates, there will be huge room for expansion.
HSBC Capital Markets Greater China Business Director Chen Shaozong said that this is an important milestone in the development of Bond Connect, and it also marks the opening of the mainland capital account. An important step. The launch of “Southbound Link” will open up a new channel for mainland investors to enter the international bond market, allowing them to further diversify their investment portfolios. andAt the same time, the launch of “Southbound Link” will accelerate the development of the Hong Kong bond market and attract more bond issuers from all over the world to issue bonds in Hong Kong.
Why do you want to open the “Southbound Link”?
“Southbound Link” is China’s promotion of the two-way opening of the financial market, the opening of capital projects, and the international An important step in globalization.
Currently, domestic investors in China can pass through Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, Qualified Domestic Institutional Investor (QDII), RMB Qualified Domestic Institutional Investor (RQDII), Qualified Domestic limited partners (QDLP), etc. carry out overseas asset allocation. QDII and QDLP have implemented quota systems. Since the beginning of this year, QDII has continued to expand, and the Guangdong-Hong Kong-Macao Greater Bay Area cross-border financial management system has also been officially launched.
Wang Dan pointed out that the next step in capital account opening is “Southbound”, that is, allowing more funds to go overseas. So far, there have been no institutional barriers to the inflow of capital into China, but the outflow is still strictly controlled. After the epidemic, the momentum of capital inflows into China is very strong. In fact, it is a window period for boosting the two-way opening of capital.
Pan Xinjiang, Chief Executive Officer of Invesco Greater China, Southeast Asia and Korea, once stated that China’s sovereign bonds may become the main asset class invested by sovereign funds and central banks in the future, especially It is because these bonds are included in the world’s major bond indexes and Bond Connect and other mechanisms have made cross-border transactions more convenient and efficient.
Hong Pizheng, Chief Executive Officer of Standard Chartered Asia, believes that as the two-way capital flow into and out of the Chinese market continues to increase, it is expected that “Southbound Link” can invest in bond types and quotas It will gradually expand in the future.
According to the central bank’s announcement today, the mainland investors participating in the “Southbound Link” at this stage are tentatively designated as 41 of the primary dealers of the People’s Bank of China’s 2020 open market business. Domestic banking financial institutions (excluding non-bank financial institutions and rural financial institutions). On the same day, Bloomberg and the China Foreign Exchange Trading Center (National Interbank Funding Center) (hereinafter referred to as the Exchange Center) also jointly announced that the two parties will provide a new seamless connection for the “Southern Link” on September 24 based on the system-based connection. Solutions. Overseas market-making institutions use this solution to provide market-making services for domestic investors. At the same time, Bloomberg also provides basic information and valuation information of qualified bonds for Nanxiangtong, and its relevant data will be displayed on the trading center platform.
Li Bing, president of Bloomberg LP Asia Pacific, said that the global financial community is looking forward to the expansion of Bond Connect, which will open up new opportunities for Chinese capital. The opening of Nanxiangtong is of great significance. It will consolidate the position of the Hong Kong market in bond financing, and will also help accelerate capital flows in the Greater China region and provide domestic investors with opportunities for diversified asset allocation in overseas markets.
Li Bing previously pointed out that in terms of transaction volume, in January and March this year, the monthly transaction value of foreign investors in China’s inter-bank bond market exceeded 1 trillion yuan, the narrow turnover rate in March reached 30%. This is slightly higher than the exchange rate of full-market government bonds plus policy bank bonds. After the opening of the “Southbound Link” and the two-way opening of the bond market, the activity of market transactions will reach a new level.
What is the macroscopic meaning of “Southbound Link”?
So far, the three major global fixed-income benchmark indexes have gradually included Chinese bonds and gradually increased the weight of China. At the same time, since March 2020, the spread between China and the United States has maintained an average of 2 percentage points, and the yield of Chinese bonds has remained at a relatively high level, and the correlation with other markets is relatively low.
The launch of “Southbound Link” at this time may not trigger a large-scale capital outflow, but will help curb unilateral bets on RMB appreciation.
Zhong Huiyong, associate professor of the School of Finance at Shanghai University of International Business and Economics, and deputy director of the Institute of Financial Development, told the news that first of all, the Southbound link can bring more to the Hong Kong bond market The potential capital of China is an important measure taken by the central government to support the construction of Hong Kong’s financial market and Hong Kong’s international financial center; secondly, domestic funds can have more investment channels, which will help diversify investment channels. Third, Nanxiangtong can also support domestic issuers to raise funds in the Hong Kong bond market. Since the cost of financing overseas is lower than that in China, it will also help reduce financing costs. The increase in the scale of offshore RMB-denominated bond issuance will also contribute to the internationalization of the RMB.
Wang Dan believes that recent financial liberalization policies have been intensively introduced, including Pudong, Hengqin, Macau, Qianhai and other places that have launched cross-border RMB services and financial liberalization. Pilot. Financial opening and trade opening are essentially the same-by introducing mature financial services and business concepts, the style of China’s financial market can be improved. The introduction of foreign capital is the introduction of competition, which will encourage Chinese financial institutions to strengthen their risk awareness and reduce financial risks. The financial sector is critical to China’s economic transformation, We must use both domestic and international markets to attract “long money” instead of hot money.