Hong Kong bond link gets underway to muted reaction

Norman Chan, chief executive of the HK Monetary Authority (left) and Pan Gongsheng, deputy governor of the PBOC, strike a gong during the launch ceremony of the China-Hong Kong Bond Connect

Trading on China’s new bond link to the rest of the world started yesterday, with little in the way of a market reaction.

First-day turnover on the system was 7 billion yuan (USD1 billion), 4.9 billion yuan of which came from bid requests, according to a statement posted on the website of the National Interbank Funding Center. Some 130 new investors registered with the program as it started, Julien Martin, head of fixed income and currency product development at Hong Kong Exchanges & Clearing Ltd. said at an investor forum. The 10-year government debt yield rose just three basis points to 3.60 percent.

The bond connect with Hong Kong, which gives offshore investors another way to access the mainland’s $10 trillion debt market, echoes the two cross-border stock connect programs available in the former British colony. The latest system, which will initially only allow one- way flows to the world’s third-largest bond market, is an effort to increase the meager foreign holdings of mainland debt, and one more step in China’s efforts to become part of the international financial system.

“More and more foreign investors need to purchase yuan-denominated assets,” Pan Gongsheng, deputy governor at the People’s Bank of China, said at the link’s opening ceremony in Hong Kong. “The bond connect meets global investors’ rising demand.”

HSBC Holdings Plc, Standard Chartered Plc and Citigroup Inc. were among banks that said yesterday that they had completed their first deals as market makers in the new system.

Previous moves to open the country’s interbank bond market to institutional investors have failed to boost foreign holdings of onshore debt. Overseas institutions’ holdings of Chinese bonds dropped to 830 billion yuan ($121 billion) as of the end of March, from 853 billion yuan three months earlier, People’s Bank of China data show. That’s less than 1.5 percent of 66 trillion yuan of outstanding notes, according to Bloomberg calculations based on the central bank data.

The link’s start comes at a time when domestic investors are growing more bullish on the nation’s bonds, after a rout spurred by a government deleveraging campaign. The yield on 10-year debt fell the most in a year last month, while a Bloomberg News survey of fixed-income traders and analysts predicts that the yield will drop to 3.40 percent at the end of September.

Yields offered by Chinese government bonds are among the highest in the world’s major economies, and the highest among those rated A1 by Moody’s Investors Service and A+ by Fitch Ratings. Onshore yields last week were 81 basis points lower than the corresponding Chinese government debt offshore, known as Dim Sum bonds, at 4.38 percent.

While the link will initially only allow Hong Kong-based investors to trade on the mainland, Charles Li, chief executive officer of Hong Kong Exchanges and Clearing Ltd., said that the company would consider opening a channel into the city if investors showed an interest.

“We are doing this simply out of market demand,” he said of bond connect’s northbound start. “Due to the interest rate gaps, there could be little interest over southbound at this moment, we don’t have timetable for southbound yet.”

“But if southbound demand increases, we’ll do southbound,” he said at the opening ceremony. Bloomberg