China's $9tn bond market opens up to foreign investors

Hong Kong China. Australian shares jumped Tuesday as investors awaited an interest rate decision by the central bank while other Asian

China has opened up its onshore bond market to foreign investors with the launch of the bond connect scheme today.

The subscription ratio, the amount of purchase requests to the amount of bonds available, stood at 2.52 for bonds issued only to overseas investors, indicating enthusiasm on the first day of trading.

"I would expect that foreign investors would initially venture into government bonds as opposed to state-owned companies (SOEs) or corporate bonds given valuations, liquidity and the fact that this is still an incipient market".

However, the share of Chinese domestic bonds held by foreign investors remained low.

"The scheme not only provides an additional channel for worldwide investors to tap into the world's third largest bond market, but also reinforces Hong Kong's strategic importance as the gateway between China and the rest of the world", said Benjamin Hung, CEO for Standard Chartered China and North Asia.

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The move aims to attract fresh funding to the Chinese bond market and strengthen Hong Kong's position as a global financial centre.

The connection will increase the supply of yuan-denominated assets that can be held by global investors as Beijing steps up the internationalization of its currency.

Deutsche Bank said it had executed its first two transactions leveraging the initiative, as did HSBC and BNP Paribas as market makers.

Overseas investors have been reluctant to enter the market amid fears over the stability of the Chinese yuan, and over potential delays to Beijing's reforms of the capital markets.

"Bond Connect will clearly make it easier for investors to access the Chinese bond market, which in turn makes it easier for investors to hold renminbi", Andy Seaman, chief investment officer of London-based Stratton Street, said in a note.

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Bond Connect does away with onerous requirements for outsiders and eases worries about taking profits out of China, but downsides include worries about the depreciating yuan and reliability of China's domestic credit rating agencies.

The scheme will also see deals coming through the primary market.

Since late a year ago, foreign investors in Hong Kong have been able to trade shares in about 900 firms in companies on the Shenzhen Stock Exchange and vice-versa following the official launch of the Shenzhen-Hong Kong trading link.

The move could further boost the Shenzhen Hong Kong Stock Connect trading link which was launched at the end of a year ago, alongside the existing Shanghai trading link.

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