4 minute read
ASIAN MARKET DEVELOPMENTS
Southbound Bond Connect: an important step in opening up China’s bond market
by China Foreign Exchange Trade System (CFETS)
On 24 September 2021, China’s Southbound Bond Connect arrangement was officially launched. Southbound Bond Connect enables Mainland institutional investors to invest in the Hong Kong bond market through a connection between Mainland and Hong Kong financial market infrastructures.
Momentum in Northbound Bond Connect
Northbound Bond Connect had been in operation for more than four years before the launch of Southbound Bond Connect. Over this time, Northbound Bond Connect became a crucial channel for overseas investors to access China’s domestic interbank bond market, offering optimized trading and settlement mechanisms. Northbound Bond Connect witnessed rapid growth in the number of investors, trading volumes, and outstanding bonds. As of the end of 2021, bonds outstanding of overseas investment in China’s domestic bond market had reached 4 trillion yuan (around 630 billion USD), with an average annual growth rate over 40%. Currently, 78 of the world’s top 100 asset managers participate in the China Interbank Bond Market.
Launch of Southbound Bond Connect
Southbound Bond Connect, which now allows Chinese domestic investors to invest in Hong Kong’s international bond markets, fully draws upon the successful experience of Northbound Bond Connect. Without changing the current policy arrangements for onshore investors to “go global” and invest in Hong Kong and the global bond market, Southbound Bond Connect provides a convenient channel for onshore domestic Chinese investors to allocate their portfolios to global bonds by strengthening cooperation between financial market infrastructures in the bond markets of the two places.
The role of CFETS
China Foreign Exchange Trade System (CFETS), also known as the National Interbank Funding Center, is a sub-institution directly affiliated to the People’s Bank of China and is an important infrastructure for China’s domestic financial markets. CFETS provides a series of services covering issuance, trade, post-trade processing, information and training services for spot and derivatives products in the interbank bond market, money market and FX market. CFETS has continued to diversify trading channels and modes for foreign investors, including agency trading and direct trading. Through the connectivity of CFETS and third-party platforms, onshore market makers provide quotations and trade with overseas investors on the CFETS trading platform, facilitating foreign investment in RMB bonds and promoting the efficient opening-up of China’s bond market. Southbound Bond Connect enables Chinese domestic investors to trade global bonds directly through CFETS. Also, it is an important initiative for CFETS in aligning with international regulations and integrating with global financial markets during the two-way opening-up of China’s bond market. By connecting its systems with third-party platforms, Shanghai Clearing House, the Cross-Border Interbank Payment System (CIPS), custodian banks and other infrastructures, CFETS enables domestic investors to trade global bonds in various currencies with market makers under Southbound Bond Connect and adopt diversified custody and settlement arrangements. Specifically, domestic Chinese investors can execute enquiries and trades in the form of request-for-quote (RFQ) with Southbound Bond Connect market makers on the CFETS trading platform. Market makers can access directly or through third-party platforms, and display market-making quotations on the CFETS trading platform. By use of the existing connections with domestic institutions and infrastructures, CFETS applies the online processing for the front and back desks to overseas bond trading, which fully accommodates the trading and settlement practices of domestic investors. So far, more than 50 onshore investors have concluded transactions through CFETS under Southbound Bond Connect, with a variety of investor types, covering primary dealers such as policy banks, large commercial banks, jointstock commercial banks, urban commercial banks, as well as Qualified Domestic Institutional Investors (QDIIs) and RMB Qualified Domestic Institutional Investors (RQDIIs) such as wealth management subsidiaries, fund companies, and asset managers of securities companies. Traded bonds include CNH, HKD, USD and euro-denominated bonds. Under the guidance of the People’s Bank of China, CFETS will further strengthen infrastructure development to better serve investors at home and abroad. Through closer cooperation with overseas electronic trading platforms and concerted coordination with relevant market infrastructures, CFETS will continuously improve the trading mechanisms to support the opening-up of bond markets, better satisfy the allocation demands of domestic and foreign investors and continue the high-quality development of financial markets.
Capital market regulatory developments in China
by Mushtaq Kapasi,
Ricco Zhang and Yanqing Jia
Rules for bond lending in the interbank market
In February 2022, PBOC published its rules for bond lending in the interbank bond market. NAFMII will formulate a master agreement for bond lending and all parties that conduct bond lending and borrowing activities should sign the master agreement. The rules replace the current interim regulations and will be effective from July 2022.
FinTech Development Plan (2022 to 2025)
PBOC issued the FinTech Development Plan (2022 to 2025) in January 2022, setting out the overall plan, development goals, key tasks, and implementation measures for the digital transformation of the financial sector.
Greater Bay Area Fintech Pilot Trial Facility
In February 2022, HKMA and PBOC started to accept applications from financial institutions and technology firms for conducting pilot trials of crossboundary FinTech initiatives in the Greater Bay Area.
