Bond Connect program opens southbound trading

The Bond Connect program between the mainland and Hong Kong opened its southbound trading on Friday, offering a new channel for domestic financial institutions to invest overseas.

According to the People's Bank of China, the central bank, 41 banks and investors under the schemes of QFII and RQFII can invest in bonds issued overseas and traded in Hong Kong's offshore market.

Standard Chartered Bank announced on Friday morning that it closed multi-currency deals and completed the bank's first foreign currency purchase transaction through the Southbound Bond Connect. Standard Chartered China is among the first batch of approved financial institutions in the mainland.

The daily cap of capital net outflows through the Southbound Connect is equivalent to 20 billion yuan ($3.1 billion), and the annual quota is 500 billion yuan, a measure taken to manage the cross-border capital flows, according to the PBOC.

The new program is expected to further improve the structure of China's capital markets, complement the Northbound flows, enhance the efficiency of asset allocation of China's financial markets, and promote the internalization of the renminbi, said Benjamin Hung, Standard Chartered CEO for Asia.

One day before the launch of the Southbound Connect, China's Ministry of Finance issued 8 billion yuan of RMB sovereign bonds in Hong Kong, providing mainland financial institutions with high-quality and low-risk investment targets, analysts said.

Under the Southbound Bond Connect program, market makers are gearing up to become real liquidity providers with more onshore investors participating in the offshore bond market. Improved liquidity will encourage more issuers to look at raising funds by issuing bonds in Hong Kong, thereby energizing the primary market, said Li Bing, head of Asia-Pacific at Bloomberg.

"We expect more onshore companies to look at issuing more dim-sum bonds in Hong Kong, as their pool of investors in Hong Kong expands with the Southbound Bond Connect," said Li.

While with the new Connect, onshore financial institutions, from commercial banks to sovereign wealth funds, are gaining exposure to data from the international market. That will require them to adopt new work flows and technologies to manage data, he added.

On the first trading day, more than 40 institutional investors from the mainland and 11 Hong Kong market makers finished more than 150 bond transactions with a trading volume of about 4 billion yuan, the PBOC disclosed in data released on Friday.

The central bank will continually work with the Hong Kong Monetary Authority and infrastructure providers to improve the policy of the Southbound Connect, according to a statement issued by the PBOC.