China and Hong Kong launched a so-called “Bond Connect” scheme as part of measures to open up the mainland to international investors.
The move is expected to greatly increase foreign participation in China´s debt market as it means overseas investors will no longer need to have an onshore account to purchase Chinese bonds.
It follows a similar connect scheme that has already been launched for equities as well as MSCI´s recent decision to include Chinese stocks in its emerging markets index for the first time.
Early trading through Bond Connect was buoyant, with Citigroup, HSBC, Standard Chartered, BNP Paribas, Deutsche Bank and Bank of China known to be among its first participants.
At the launch ceremony of Bond Connect, a screen indicated that bonds worth 2.15bn yuan ($295 million) had been acquired within the first 22 minutes of trade.
Faced with a weaker domestic economy, the Chinese authorities hope that drawing foreign investment into the country will help prop up growth.
For the time being, the authorities are only allowing the Bond Connect scheme to be used for overseas investors to tap Chinese markets, rather than enabling Chinese institutions a more direct link to pursue their own global investment ambitions.
At present, international holdings in China´s $9tn bond market are estimated to account for less than 2% versus an average of around 10% for other major global debt markets. China´s bond market is the third-largest in the world.
Goldman Sachs estimates that over the next decade more than $1 trillion of additional global fixed income investment could be allocated to China.
Bond Connect follows the launch of the Stock Connect scheme, which allows foreign investors to more readily invest in Chinese equities. Given the increased participation in Chinese stock markets by foreign investors, MSCI also recently included China in its emerging markets equities index for the first time.
Over time, Bond Connect and the other similar initiatives are expected to accelerate the internationalisation of China´s currency. While this could take some time, the renminbi could eventually rank alongside the dollar and the yen in its importance as foreign institutions raise their holdings.
China gave the green light for Bond Connect in May. While foreign investors have been allowed access to China´s interbank debt market since 2016, they were previously required to set up an onshore account.