OFFSHORE investors looking to access China’s bond markets still prefer to access the market through the China Interbank Bond Market (CIBM) Direct, rather than the Bond Connect channel.

Investors favour the CIBM Direct because, among other things, the Bond Connect does not offer a delivery versus payment (DVP) settlement procedure in which the buyer’s payment for securities is due at the time of delivery. Conversely, the CIBM Direct allows both a wider range of instruments for hedging and gives greater access to market information, according to investors speaking Asset Benchmark Research (ABR) in a recent survey.

Currently, CIBM Direct is a more popular channel for accessing China’s onshore market than the Bond Connect, according to the survey. More investors reported using or planning to use the CIBM Direct than those using or planning to use the Bond Connect.

Data from Asset Benchmark Research

Despite being the less popular channel, there are certain advantages to the Bond Connect. “Bond connect does not require the establishment of a direct contractual relationship with local custodians. The ease of the application process is also better received by institutional investors, who are in general more accustomed to the global custodian platform, once the DVP issue is addressed,” says one Hong Kong-based investor.

However, the lack of DVP is still a major issue, which investors expect the regulators to tackle soon. “I think it is not hard to achieve DVP because we expect the regulator is actively looking into this. I expect the settlement model of China Central Depository & Clearing Co will eventually be aligned with Shanghai Clearing House to support DVP,” a Singapore-based investor explains.

The Bond Connect is also more time consuming. “The deals made through CIBM Direct are usually quicker. For Bond Connect, it takes time to get through all the parties which are involved in trading and settlement,” an investor currently using CIBM Direct and not the Bond Connect explains.

“There’s the issue with the access with CNY. The global custodians haven’t figured out how to manage the trade flow for the funding for CNY,” adds a Singapore institutional investor.

On the other hand, the CIBM Direct remains attractive for several reasons. First, it allows investors to use a wider range of hedging tools such as interest rate swaps and forward rate agreements. “We choose CIBM because of the availability of the instruments,” says one institutional investor based in Singapore.

Another substantial benefit of using CIBM Direct is the exposure of onshore bond market information. “The problem with Tradeweb (the trading platform for the Bond Connect) is that you seldom get information about the onshore bond market as you are not communicating with traders and sales in person over the counter. I believe CIBM Direct offers us more exposure to the onshore bond market. And in fact, we trade more often via CIBM than Bond Connect. Eighty percent of our trades in the onshore bond market are made through CIBM Direct,” explains a Taiwan-based investor.

These data are part of ABR’s Asian Local Currency Bond Benchmark Review 2018.

Methodology
The Asian Local Currency Bond Benchmark Review is conducted in the first quarter of the year. Over 300 local currency bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from 11 Asian markets namely China, CNH, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand take part.

Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. To learn more about the Asian Local Currency Bond Benchmark Review please click here.