Bond Connect recognized globally amid 2nd anniversary

HONG KONG - With record overseas investment flooding in, the Bond Connect program that links markets of the Chinese mainland and Hong Kong has won global recognition amid its second anniversary and played a more active role in the opening-up of the world's major bond market.

By the end of June, the program has attracted 1,038 global investors, more than double the number of 2018, including 62 of the top 100 asset management companies in the world. With the arrival of the first batch of investors from Abu Dhabi last month, its services have expanded to 29 countries and regions.

Trading records have also been refreshed. Bond deals worth 172.2 billion yuan ($25 billion) were made under Bond Connect last month, with an average daily turnover of 9.06 billion yuan ($1.32 billion) and the highest single-day trading volume at 16.2 billion yuan ($2.36 billion), all posting the best performance.

"Bond Connect made major progress in the past year, along with the advance of China's interbank market opening-up," Zhang Cuiwei, chairman of Bond Connect Company Ltd, said Wednesday at a forum.

The Bond Connect program, launched in July 3, 2017, granted overseas investors an easier access to the Chinese mainland's interbank bond market and has since then saw increasing popularity among investors.

A series of reform and innovation measures rolled out since last July have helped build up the program's global reputation.

Effective since November, the interest income of foreign institutions investing in China's interbank market started to be exempted from the income tax and value-added tax for three years. Overseas investors in January became able to buy or sell Chinese bonds through Bloomberg's terminals under the framework of Bond Connect.

Bond Connect Company also worked with mainland financial institutions including Agricultural Development Bank of China to improve information disclosure for foreign investors.

Laura Cha May-Lung, chairman of Hong Kong Exchange, pointed out that Bond Connect is a major step for the opening of China's bond market as foreign investors can enter the market in a one-stop manner without changing the existing trading methods, settlement models and account structures.

Sammy Yip, Vanguard's head of product management in Asia, is a frequent user of Bond Connect, and he said with this new channel the investment management company has launched passive investment products focused on Chinese bonds in the United States, Australia and some European countries.

In fact, numerous traders around the world have used the Bond Connect as often as Yip. Deals reached under the program has amounted to 2 trillion yuan ($291.1 billion) in the past two years, and net purchases of Chinese bonds surpassed 500 billion yuan ($72.8 billion) in the first six months of 2019.

Cha said the program has shown its advantages and vitality and has helped bring China's bond market opening-up to a new level along with other investment channels.

The success of Bond Connect also added to evidence of the robust demand from foreign investors for Chinese bonds.

Gao Fei, an official with the People's Bank of China, the central bank, said Chinese bonds, with high yields and low default rates, have a relatively strong appeal to international investors. "China's bond market is backed by solid economic fundamentals," Gao said, citing safe foreign exchange reserves, stable renminbi exchange rates, and balanced capital flows.

China's bond market stood at about 86 trillion yuan ($12.52 trillion) by the end of 2018, with about 1.8 trillion yuan ($261.9 billion) held by foreign investors. The market size was the third largest globally and the second largest in Asia. Observers predict China will surpass Japan to become the world's second largest bond market this year.

The Bloomberg Barclays Global Aggregate Index started including China's yuan-denominated bonds on April 1. Analysts believe two other major global bond indices, the FTSE World Government Bond Index and the JP Morgan Government Bond Index-Emerging Markets, will hopefully follow suit in the future.

What foreign investors care the most is the potential of China's bonds. The current proportion of foreign investors' holdings in China's interbank bond market is still far below the level of developed markets in the world, pointing to much room for further opening-up.

Gao said China's effort to internationalize its bond market will continue, citing measures including making rules in line with international standards, encouraging the launch of more bond index funds, and promoting the cooperation of local and global custodian banks.

"In terms of Bond Connect, we will expand the scope of quotation agencies, optimize relevant trading mechanisms, improve supportive institutional arrangements, and promote the integration of Bond Connect and other investment channels," Gao said.

Optimistic about the prospects of China's bond market, Yip said Vanguard has been actively investing in it and this strategy will not change. "The Chinese market is very large and cannot be ignored. China is a very good investment destination from the perspective of digesting risks or diversifying investments. We will continue to invest in China in the future."