The international attractiveness of China's bond market has increased significantly
2024-07-15
As an important channel for China's bond market to attract foreign investment, the bond access has been open for seven years by July this year. In the past seven years, the coverage of Bond Connect has significantly expanded, the number of market entrants has continued to increase, and the trading volume and activity have increased significantly. In the past seven years, Bond Connect has provided more extensive investment options and more convenient investment channels for domestic and overseas institutions. At the "Bond Connect Annual Forum 2024" held on July 9, Jiang Huifen, Deputy Director of the Financial Market Department of the People's Bank of China, revealed that the relevant supporting measures of Bond Connect would be further improved. The People's Bank of China will start the business of supporting overseas institutions to use Bond Connect North to pay bond swap deposits, and will promote the business to go online as soon as possible. After seven years of rapid growth, Bond Connect has become an important bridge connecting domestic and overseas financial markets and an important channel for foreign capital to continue to flow into China's financial markets. As an important channel connecting the mainland and the international financial market, the Bond Connect "North Link" was launched on July 3, 2017, providing a more convenient channel for international investors to participate in China's inter-bank bond market. On September 24, 2021, the "South Link" of Bond Connect was successfully opened. Under the premise of closed-loop management and controllable risk, mainland investors can invest in overseas bonds through the Hong Kong bond market, realizing the "north-south two-way" connectivity of the bond market. On the basis of Bond Connect, the mainland and Hong Kong interest rate swap market interconnection and cooperation (hereinafter referred to as "Swap Connect") will be officially launched on May 15, 2023 to facilitate overseas investors to participate in domestic financial derivatives transactions and better meet the interest rate risk management requirements of overseas investors. Over the past seven years, the scale of the Bond Connect has gradually expanded, and the depth and breadth of China's bond market's opening up has been constantly improved. By the end of May this year, the total amount of Chinese bonds held by foreign investors had reached a record high of 4.27 trillion yuan, an increase of 400% compared with that before the opening of Bond Connect. 1128 overseas institutions have entered the Chinese bond market, about 2.7 times that of Bond Connect before its opening, covering central bank institutions and commercial institutions in more than 70 countries and regions, of which 85 have entered the market for investment, and more than 80 of the world's top 100 asset management institutions have entered the market for investment. Wang Dahai, President of Bloomberg Greater China, said that, as an important milestone in the opening of China's bond market, since the launch of Bond Connect, the mechanism has been continuously optimized, and its high convenience has made it one of the most important channels for international investors to participate in China's bond market, and the transaction activity has continued to increase. At the same time, the interconnection mechanism is constantly enriching and improving, promoting the further integration of China's financial market with the international community. The Chief Executive of the Hong Kong Monetary Authority, Yu Weiwen, stated that in recent years, the volatility of the global financial market has intensified and the international environment has become increasingly complex. However, the willingness of international investors to invest in RMB assets has increased instead of decreased. According to the data released by the People's Bank of China, as of the end of May this year, foreign investors have increased their net holdings of bonds in the onshore inter-bank market for nine consecutive months, and Bond Connect has contributed greatly. At present, more than 820 institutional investors have participated in the Bond Connect "Northbound Connect"; The daily average transaction volume has jumped from about 1.5 billion yuan in the first month of opening to 46.6 billion yuan in May 2024, an increase of more than 30 times. In the future, the demand for domestic bonds from overseas investors will definitely continue to grow, and their demand for liquidity and risk management will also increase; On the contrary, mainland investors' demand for diversified allocation, especially for overseas bonds, will gradually increase Yu Weiwen said. Significant increase in global influence In recent years, the international influence and attraction of China's bond market have significantly increased. Jiang Huifen said that in recent years, global investors continued to be bullish on the Chinese bond market. By the end of May this year, foreign investors had increased their holdings of Chinese bonds for nine consecutive months, with a cumulative increase of more than 1 trillion yuan. Huang Jiacheng, managing director of Jingshun and head of fixed income in the Asia Pacific region, said that these data showed that Bond Connect had promoted the rapid growth of foreign capital's holdings of Chinese bonds and the internationalization of China's bond market. From the perspective of the depth of the bond market, Bond Connect has also promoted the multi-level development of China's bond market, and promoted the innovation and development of the market. Since 2019, Chinese bonds have been included in three global bond indexes, including Bloomberg Barclays, JPMorgan Chase and FTSE Russell. Among them, the weights in the Bloomberg Barclays Global Composite Index and the FTSE treasury bond bond index are close to 10%, which are higher than the estimated weights when they were initially included in the index, and have reached the maximum weight of countries in the JPMorgan Chase Global Emerging Market Government Bond Index. Huang Qingfeng, senior fixed income investment strategist of Lianbo Group, told the Economic Daily that over the years, Bond Connect has provided international investors with a more complete, convenient and fast way to invest in the domestic bond market. With the gradual inclusion of Chinese bonds in major global bond indexes, Bond Connect has effectively promoted overseas institutions to invest in China's bond market, and improved the internationalization level of China's fixed income market. As China's economic growth momentum continues to be activated, the high-quality development of China's bond market is steadily advancing, and RMB bond assets show good investment value. Jiang Huifen said that from the perspective of yield, the short-term and long-term yield, nominal and real yield of Chinese bonds are among the top in the world. From a short-term perspective, according to the latest data from FTSE Russell, in April 2024, the investment return rate of Chinese government bonds denominated in RMB or USD ranked first in the world, and Chinese government bonds are the only government bonds in the world with a positive investment return rate. From a long-term perspective, according to Bloomberg data, China's bond portfolio holding the Bloomberg Barclays Global Composite Index in the past 10 years, regardless of whether foreign exchange hedging is carried out, can obtain about 70% of the income. Against the backdrop of global high inflation, excluding inflation factors, the actual yield of RMB bonds is still relatively high, providing a very good way for global RMB holders to preserve and increase their value. Jiang Huifen stated that from the perspective of hedging attributes, RMB bonds have high diversified investment value, and their hedging function is constantly strengthening. From the perspective of liquidity, the trading of RMB bonds is active and has become a widely recognized high-quality liquid asset. From the perspective of development potential, the total custody balance of China's bond market exceeded 163 trillion yuan, ranking second in the world. At present, the proportion of foreign investors holding bonds is only 2.6%, which still has great potential and space for opening up compared to developed economies and some emerging market economies. Supporting measures continued to improve In recent years, China's bond market has made remarkable achievements in opening up, and the overall structure has become increasingly perfect. In the past year, 'Swap Pass' has launched multiple optimization measures to provide investors with more efficient risk management tools. The RMB treasury bond bonds and policy financial bonds under Bond Connect's "Northbound Link" are included in the list of eligible collateral for RMB liquidity arrangements of the Hong Kong Monetary Authority, which is conducive to laying the foundation for domestic bonds to become widely accepted joint venture collateral worldwide. To meet the demand of overseas investors for risk hedging strategies when making cross-border investments, the "Swap Pass" will be launched in May 2023. In May of this year, "Swap Connect" launched multiple optimization measures, including the addition of standardized interest rate swap contracts with international currency market settlement days as the payment cycle, and the extension of fee discount periods. Huang Jiacheng believes that these optimization measures have better mobilized the enthusiasm of overseas institutions to participate in the "Swap Connect", better met the diversified risk management needs of domestic and foreign investors, further reduced the cost of investor participation, and also laid a good foundation for the further expansion of the "Swap Connect". As of the end of May, the "Northbound Swap Connect" has attracted 61 foreign institutions to enter the market, with a total of more than 4300 transactions completed, with a nominal principal of about 2.2 trillion yuan, and a daily transaction volume that has grown several times. Next, relevant supporting measures will continue to be gradually updated. Jiang Huifen revealed that the People's Bank of China will start the business of supporting overseas institutions to use bond link north to pay bond swap deposits. This business will further expand the application scenario of RMB bonds as offshore qualified collateral, which is conducive to revitalizing domestic RMB bonds held by overseas institutions and reducing the cost of overseas institutions participating in the "swap link". The People's Bank of China will work together with the Hong Kong side to prepare for the launch of the Northbound Bond Bond Payment Swap Margin Business as soon as possible. It is reported that the People's Bank of China is actively studying the optimization measures to promote the opening up of the bond market and improve the level of cross-border investment and financing facilitation: first, deepen the expansion of the connectivity of domestic and overseas financial markets, continue to improve the mechanism arrangement of Bond Connect and "swap link", steadily and orderly promote the connectivity cooperation between domestic and overseas infrastructure custodian banks, promote the mutual recognition of cross-border regulatory qualifications of infrastructure, and orderly promote the cross-border service provision of infrastructure "going global"; Secondly, we will improve the liquidity management and risk hedging tools for overseas investors, enrich derivative instruments such as interest rates and exchange rates, and explore and expand the mechanism of using RMB bonds as offshore qualified collateral; The third is to reduce the investment costs for foreign investors entering the market, jointly study with the Ministry of Finance, improve the tax exemption policy arrangements for foreign investors, further optimize the investment process for entering the market, and provide a more friendly and convenient investment environment for foreign investors. The market also has more expectations. "Some links of Bond Connect, such as transaction registration procedures and bond delivery processes, still have room for further simplification in the future." Huang Jiacheng said that currently investing in domestic bonds, during the bond delivery process, dealers, traders, middle and back offices all need to complete the bond delivery through email confirmation. At present, we require the counterparty to ensure email confirmation within 1 hour after completing the transaction to avoid delivery issues. However, this also makes the time for all parties involved in the trading and delivery process tight. If the relevant processes can be automated, it will greatly improve the convenience of bond trading and delivery. Huang Jiacheng suggests that we can refer to the trading process of overseas bonds and explore the automatic completion of delivery directly through the central trading matching platform. Huang Qingfeng suggests that customized SWIFT (Society for Worldwide Interbank Financial Telecommunication) messages should be used for different custodian bank requirements during transaction operations. If a standardized SWIFT information system can be developed among custodian banks in the future, it may be conducive to further improving the operational efficiency of Bond Connect. Jiang Huifen stated that the People's Bank of China will continue to deepen the high-level opening up of China's financial market to the outside world, support the prosperity and development of Hong Kong, and provide strong support for accelerating the construction of a strong financial country. By opening up the financial market at a high level, promoting deep level reforms, advancing high-quality development, and injecting Chinese strength into the global financial market opening and development. (New Society)
Edit：Lubaikang Responsible editor：Chenze
Source：ce.cn
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