By Umesh Desai and Andrew Galbraith
HONG KONG/SHANGHAI (Reuters) – China and Hong Kong launched a long-awaited Bond Connect scheme on Monday that links China’s $9 trillion bond market with overseas investors, the latest step in Beijing’s efforts to liberalize and strengthen the country’s capital markets.
Global investors were active, purchasing 4.9 billion yuan ($721.4 million) of bonds through the program on Monday. But traders and foreign investors warned against reading too much into first-day trading numbers.
“Chinese institutions will have to meet their ‘supportive obligations’,” to ensure the successful launch of the program, said a Shanghai-based trader. “Let’s wait to see one-week or one-month volume.”
Monday’s aggregate trading volume was 7.05 billion yuan, the China Foreign Exchange Trade System said on its website.
HSBC Holdings <HSBA.L> and an asset management unit of Bank of China were the among the first to complete trades using the scheme.
The launch of the connection was timed to coincide with the 20th anniversary of Hong Kong’s handover to Chinese rule and initial trading will only be “northbound”, meaning foreign investors will be able to buy and sell Chinese bonds.
No launch date has been set for the southbound channel. Demand for such a channel was limited, Hong Kong Exchanges and Clearing Ltd (HKEx) chief executive Charles Li said.
Credit Suisse Private Banking reiterated on Monday that it is negative on onshore bonds and expects yields to rise further this year.
In line with broader foreign access rules, overseas investors including pension funds, central banks and sovereign wealth funds will be eligible to trade sovereign and local government bonds, policy bank bonds and corporate debt on the Bond Connect.
The connection will increase the supply of yuan-denominated assets that can be held by global investors as Beijing steps up the internationalization of its currency. In a note on Monday, Goldman Sachs said it holds the view that more than $1 trillion of global fixed income investments could be allocated to domestic Chinese bonds in the next decade.
Such inflows could help to support the yuan’s value in the long run.
However, some market watchers said a strong launch could hamper the currency’s internationalization.
“A successful Bond Connect operation will actually be counterproductive to renminbi internationalization in the short-term. This is because it will lead to more renminbi flowing back to China and, thus, further erode the CNH pool,” said Chi Lo, senior economist at BNP Paribas Asset Management.
Chinese regulators formally approved the Bond Connect scheme in May. International investors have been allowed direct access to China’s interbank bond market since last year and some market participants have questioned the need for an additional trading scheme.
Reluctance by overseas investors to enter the market amid fears over the stability of the Chinese yuan, and over potential delays to Beijing’s reforms of the capital markets has kept overseas holdings to less than 2 percent. This is below the international norm of about 10 percent, BNP Paribas said.
Media reports said 20 market makers for the Bond Connect scheme had been approved, including 14 Chinese and six overseas institutions.
BNP Paribas said it had received approval as a market maker and had also executed its first trade under the scheme. Citigroup and Standard Chartered also confirmed to Reuters that they had been approved as official dealers.
The scheme will also see deals coming through the primary market. China Development Bank [CHDB.UL] said it planned to issue up to 20 billion yuan ($2.95 billion) of one-year, three-year and 10-year fixed-rate bonds for tender on Monday. HSBC said it is one of the underwriters.
Hong Kong’s new leader, Carrie Lam, attended the debut ceremony and said the connect scheme marked “another new chapter in the development of mutual capital markets access between the mainland and Hong Kong.”
The bond program follows the launch of the Hong Kong and Shanghai Stock Connect scheme in November 2014 and the Hong Kong and Shenzhen stock program in December 2016. Those two schemes allow both northbound and southbound trade.
(Reporting by Umesh Desai, Donny Kwok and Andrew Galbraith; Editing by Anne Marie Roantree and Richard Borsuk)