On 21 June 2017, the People’s Bank of China (PBOC) promulgated the Interim Measures for the Administration of Mutual Bond Market Access between Mainland China and Hong Kong (Decree No.1 ) (Interim Measures). This Bond Connect initiative is designed to cover both a northbound and a southbound trading link; at present only the northbound programme is available.
Eligible investors, eligible products and Bond Connect generally
The scope of eligible investors is the same at that specified in PBOC’s Circular of 2016 on the direct access regime (the DAR). This includes (i) foreign central banks or monetary authorities, sovereign wealth funds, international financial organisations; (ii) QFII and RQFII; and (iii) foreign commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions that lawfully registered and incorporated outside the territory of PRC and investment products issued by such institutions.
In terms of the scope of products covered by Bond Connect, all bonds circulated in China Interbank Bond Market (CIBM) are eligible. Foreign investors may subscribe for bonds during initial offerings or purchase bonds on the secondary trading CIBM.
Unlike QFII and RQFII (where there is a quota restriction) or the DAR (where there is not an official quota restriction, however each investor needs to file its anticipated investment amount with the PBOC, and submit an updated filing, if it fails to remit investment principal equal to at least 50% of such amount within nine months), there is no quota restriction, officially or unofficially, for Bond Connect.
Under Bond Connect, an investor may directly appoint China Foreign Exchange Trade System & National Interbank Funding Center (CFETC) as its agent to apply for registration with PBOC, whereas under the DAR, an investor must engage an onshore trade and settlement agent (typically a PRC bank).
Custody, ownership, trading and settlement
Under the northbound trading link, the HKMA’s Central Moneymarkets Unit (CMU) will open omnibus nominee accounts with China Securities Depository & Clearing Corporation Limited and Interbank Clearing Company Limited. All bonds traded by overseas investors will be registered in the name of the CMU, which will hold such bonds as a nominee owner. As with the Mainland-Hong Kong Stock Connect programme, Bond Connect recognises overseas investors’ beneficial ownership of bonds.
Currently overseas investors may only use Bond Connect for spot trades, whilst the DAR also allows bond lending, bond forwards, forward rate agreement and interest rate swap for so long as such transactions are for hedging purposes only.
In line with international market practice, overseas investors will trade with market makers. The list of PBOC-recognised market makers can be found on CFETC’s website.
Both Bond Connect and the DAR contain rules to prevent overseas investors from utilising such channels for the purposes of exchange arbitrage.