On May 16, the Hong Kong Monetary Authority and the People’s Bank of China formally approved the Bond Connect initiative linking the bond markets in the two jurisdictions.
Little was said about how the initiative might work beyond the fact that – initially, at least – all trading will be northbound (that is, from Hong Kong to China).
Also, no date was given for when trading might start, although there has been some speculation that this could coincide with the twentieth anniversary of the handover of Hong Kong by the British to Beijing, which falls on July 1.
At first glance, now might not seem to be the best moment to persuade investors to sink their money into China’s onshore $9 trillion bond market.
While the onshore mainland investor would derive clear value from being able to access Hong Kong-dollar denominated bonds – they would be able to use them as a hedging tool to guard against future US interest rate hikes, for example – the appetite among global investors for Chinese debt is waning.
The main area of concern is volatility of the renminbi. As the US has embarked on its programme of fiscal tightening, the renminbi has fallen from 6.67 against the USD last October to just shy of 6.9 today. And with markets pricing in two more US rate rises this year, more shocks to the Chinese currency are just around the corner.
China has suffered other disconcerting news, too. Less than a week after the formal approval of the Bond Connect scheme, Moody’s downgraded China’s sovereign rating to A1 from Aa3, which could deter some global investors from piling into the mainland’s bond market.
As one senior bond trader at a global investment bank puts it, such macroeconomic trends don’t completely erode the value that the long-awaited Bond Connect initiative could bring both Hong Kong and Beijing, but they do take some of the shine off of it.
But while authorities in both jurisdictions may not want to ignore such macroeconomic indicators altogether, they would be wrong to delay the launch date purely because of investor apathy.
Index providers are now starting to include onshore Chinese debt in their bond market benchmarks. Citigroup became one of the first major ones to do this in March, and others are likely to follow.
The rationale behind such a step is that access to Chinese debt markets is becoming easier. Bond Connect, once launched, will only be one of the ways that investors can access the onshore bond market. In February, Beijing relaxed restrictions on foreigners accessing the China interbank bond market. Access to the onshore bond market is also possible through the country’s Qualified Foreign Institutional Investor programme.
Having Bond Connect in place before Chinese debt is embedded in some of these major indices will only serve to strengthen the initiative. Not doing so is a missed opportunity.