The Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBoC) have announced that southbound trading under its cross-border Bond Connect programme will begin on September 24.

Southbound trading under the Bond Connect will provide mainland institutional investors with a convenient and secure channel to invest in the Hong Kong bond market via connections between mainland and Hong Kong financial institutions.

“The launch of southbound trading marks another milestone of mutual access between Hong Kong and mainland capital markets,” says Eddie Yue, the HKMA’s chief executive officer. “Northbound trading has been operating smoothly since its launch more than four years ago, and has been well received by international investors who trade mainland bonds through Hong Kong.”

The northbound scheme, Yue shares, has attracted huge capital flows into the mainland financial markets, created enormous opportunities for Hong Kong’s financial institutions, and laid a good foundation for the launch of the southbound version. 

“The HKMA has maintained a close dialogue with the PBoC over the past few months on the policy framework of southbound trading,” Yue adds. “Southbound trading will deepen the two-way opening up of the mainland financial markets and promote the vibrant development of the Hong Kong bond market, thereby consolidating the city’s status as an international financial centre.”

The southbound launch, which enables the two-way connectivity of offshore and onshore bond markets, is an important move in the continued opening up of China’s financial markets, shares Alvin Cheng, fixed-income portfolio manager at Fidelity International.

“Under the Southbound Bond Connect scheme, domestic investors will be able to choose their own trading settlement method, which is expected to effectively improve the proactivity and vitality of domestic institutions participating in cross-border bond allocations, making Southbound Connect a convenient and efficient channel for cross-border bond allocation,” Cheng adds. "The launch is beneficial to domestic investors who intend to increase investment in overseas bonds issued by Chinese corporations, especially the Chinese-issued USD bonds, which account for more than 90% of the total overseas bonds issued by Chinese corporations”.

Chinese-issued USD bonds are of great asset allocation value for domestic investors given their significant differences with domestic corporate bonds in liquidity, risk-return profiles and variety.

Southbound trading represents a “ground-breaking conduit for mainland investors to access international bond markets”, comments Justin Chan, head of Greater China, global markets, Asia-Pacific, HSBC. “The new link is set to accelerate the development of primary and secondary bond markets in Hong Kong. Offshore bonds could appeal to onshore mainland investors who wish to diversify their portfolios. As the market grows, more global bond issuers will be attracted to Hong Kong.”