China to ease outbound investment with Southbound Bond Connect

China will make it easier for its investors to trade offshore debt from next week with the opening of a “Southbound” leg of its Bond Connect channel, in the country’s latest move to encourage more outbound investment.

In a joint statement on Wednesday, China’s central bank and the Hong Kong Monetary Authority said the Southbound Bond Connect channel would launch on September 24, more than four years after the Northbound leg expanded foreign investors’ access to China’s bond market, the world’s second-largest.

The People’s Bank of China said that 41 mainland banks, as well as participants in China’s Qualified Domestic Institutional Investor (QDII) and Renminbi QDII schemes, would participate in the new arrangement.

The scheme will feature an initial daily quota of 20 billion yuan (HK$24 billion), and an annual quota of 500 billion yuan (HK$600 billion). No quotas apply to trades through the Northbound leg.

“Connect schemes were not built in one day. We expect to see southbound trading develop in a gradual manner with proper risk management practices in place,” Hong Kong Monetary Authority Chief Executive Eddie Yue told a news briefing.

In a separate announcement on Wednesday, the China Foreign Exchange Trade System said that it would publish a list of specific bonds eligible for trade through the programme and update it according to market conditions and investors’ needs.

Edmond Lau, the HKMA’s deputy chief, told the briefing that all bonds traded in Hong Kong regardless of currency could be included in the scheme.

The announcement of Southbound Bond Connect comes less than a week after China kicked off a new Wealth Management Connect programme linking the southern province of Guangdong with Hong Kong and Macau.

The introduction of Wealth Connect and Southbound Bond Connect “signals that China is less worried about portfolio outflows as the country forges ahead with deeper financial penetration,” Carlos Casanova, senior economist for Asia at Union Bancaire Privee, said in a note.

But while the two schemes would likely encourage more cross-border flows and lead to great integration of the “Greater Bay” area linking Hong Kong, Guangdong and Macau, “the market reaction should prove to be limited initially given limited coverage,” said Ken Cheung, chief Asian FX Strategist at Mizuho in Hong Kong.

The Northbound Bond Connect, launched in July 2017, has become a major channel for foreign investors seeking access to China’s bond market.

Average daily turnover through Bond Connect reached 26.3 billion yuan (HK$31.6 billion) in August, up 35 percent from a year earlier, according to Bond Connect Co. Ltd, a joint venture between HKEX and the China Foreign Exchange Trade System that operates the programme. (Reuters)

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