Hong Kong and China finalise Bond Connect initiative

Following efforts to strengthen ties between their stock exchanges, Hong Kong and China finish work to unite bond markets

Celebrations have rung out from the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBOC) following their finalisation of Bond Connect.

The ambitious scheme will open up mutual access between bond markets in the regulators’ respective territories through a single, cross-border platform.

It builds on progress that Hong Kong and China have already made with strengthening the ties between their stock exchanges via Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (known more widely as the ‘Shanghai Connect’ and ‘Shenzhen Connect’ schemes).

In a statement, HKMA explained that Bond Connect comprises two components: settlement and trading. The settlement function will be conducted through accounts opened by HKMA’s Central Moneymarkets Unit (CMU) at China Central Depository & Clearing Co Ltd and Shanghai Clearing House.

“As CMU will handle the account opening procedures and compliance requirements,” the regulator explained, “overseas investors will have greater flexibility and convenience when investing in the mainland bond market.

“This will also generate greater demand for Hong Kong’s related financial services, such as custody and settlement, asset management [and] risk management. Furthermore, Bond Connect will enhance trading efficiency by providing a new platform that supports direct trading between overseas investors and mainland dealers.”

HKMA chief executive Norman Chan said: “Bond Connect marks another milestone in the liberalisation of the mainland’s capital account.

“The implementation of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Connect has greatly enhanced mutual access between the stock markets of the mainland and Hong Kong. The bond market constitutes another major component of the capital market.”

Chan noted: “The mainland now hosts the world’s third-largest bond market, with an outstanding amount of about ¥65 trillion. The less-than-2% holding by overseas investors provides [them with] ample room [to have a] much stronger presence.

“Through the Bond Connect platform, Hong Kong will serve as the gateway for overseas investors to enter the mainland bond market – leveraging our role as an international financial centre, as well as an intermediary for capital flows between the mainland and international markets.”

In a separate, joint statement, HKMA and PBOC outlined steps towards the creation of a regulatory framework that will underpin the scheme. “Regulators of the Hong Kong and mainland bond markets will respectively take all necessary measures to establish, in the interest of investor protection, effective mechanisms under Bond Connect to respond to any misconduct in a timely manner,” they said.

“Regulators of the Hong Kong and mainland bond markets will enter into a memorandum of understanding… to establish effective supervisory cooperation arrangements and liaison mechanisms, in order to maintain financial market stability and fair trading.”

Chan added: “Hong Kong is Asia’s premier international financial centre. We are strategically positioned as the natural gateway linking our mainland hinterland to the world.

“Bond Connect is another major move that uses the Hong Kong platform to strengthen the connectivity between the mainland and global capital markets.”

Bond Connect’s formal launch date will be announced in due course.

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