Foreign investors will soon finally be able to buy and sell Chinese bonds, thanks to a new scheme launched to coincide with the 20th anniversary of the handover of Hong Kong to China. Beijing’s Bond Connect programme hopes to attract foreign capital by opening up China’s financial markets, including its $9 trillion bond market. Whilst this is the third largest in the world, just 2% of the bonds are currently foreign-owned.
Bonds can be seen as “IOUs” sold by governments in order to raise funds. Investors find them attractive thanks to their fixed interest rates and the guarantee of repayment in full once the bond expires. At first, only banks, insurers and fund managers will be able to buy Chinese bonds through Hong Kong, and there is currently no set date for Chinese investment in foreign bonds.
Should they choose to purchase Chinese bonds, investors are set to gain greater access to investments denominated in the yuan or renminbi, the currency of China. There has historically been a degree of caution over doing this due in part to concerns over the yuan’s stability. The perceived lack of urgency from Beijing to reform its financial markets has also played a part in past wariness, as well as doubts over the reliability of the credit ratings for Chinese bonds.
The launch of this scheme follows the rolling out of similar systems enabling Chinese share deals in recent years. China’s mainland domestic shares were included for the first time in US stock index provider MSCI’s emerging markets index in June this year. The launch of the Shenzhen-Hong Kong trading link at the end of 2016 allowed foreign investors to trade shares in around 900 firms in companies listed on the Shenzhen Stock Exchange; and the establishment of the Shanghai-Hong Kong Stock Connect in November 2014 allowed investors trading access to hundreds of Shanghai-listed A-shares and Hong Kong stocks.