China is opening a new route to foreign investment via Hong Kong. Mainland China and Hong Kong will now be parties to a bond trading platform. This initiative will open the $9.4 trillion strong Chinese bond market to the world. However, a formal launch date has not been announced.
China has the third largest bond market in the world which has, till now, been averse to foreign investment. In this move, the country is opening to new investment and luring investors to jump into the Chinese markets via Hong Kong.
The Bond Connect Program will facilitate cross border transactions, but is mainly designed to let global investors in. There will be cross border trading links between Shenzhen, Shanghai, and Hong Kong. At first, there will be northbound flow of funds. Southbound flow would be explored later along the way.
Northbound Trading Makes Global Investors Happy
Chinese authorities have always kept their market close for foreign investment. However, with recent reports from the central bank related to massive outflow of funds, the authorities have taken a different route. Now, they want to let global investors become a part of the Chinese economy, although indirectly.
A northbound fund flow means that money will move upwards to mainland China, passing through Hong Kong. There is already a Shanghai-Hong Kong equity channel. In December last year, the southern city of Shenzhen also opened an equity channel with Hong Kong.
Now, about 1,400 stocks listed on Chinese equity markets are available for foreign investments. Southbound option could have been facilitated with ease, but the two wish to move northbound first. This is because going south could have more infrastructure resistance.
What Should Hong Kong Expect?
The Hong Kong Exchanges & Clearing Ltd becomes primary conduit for this partnership. The firm’s CEO, Charles Li wants to open new channels to allow foreign investment in the mainland. Now that the bond market has been opened, the firm will follow up with ETFs, commodities, and IPOs as well. There are chances that a more liberal mainland Chinese market will help in creating accelerated economic activity in Hong Kong too.
As all funds routed to mainland Chinese exchanges go through Hong Kong, there will be increased interests of global investors in setting bases here. In due course of time, when the southbound channel opens, Hong Kong stocks and bonds will also benefit. Chinese investors are keen to fly their funds out of the country and Hong Kong could become their safe haven.