China’s bond market is officially opened to the world market. The economic powerhouse’s 10 trillion bond market was opened on Monday to investors. This latest liberalization step by the Chinese government is directed to battle the slow economic growth in the country meaning that investors will now have access to the third largest economy in the world. Foreign investors will now account for 11 percent of assets within China’s debt market. China expects this move to deeply integrate her markets with the world financial system.
Qualified investors include central banks, sovereign wealth funds, and other major financial institutions. According to the People´s Bank of China (PBoC) and the Hong Kong Monetary Authority, who jointly announced the platform, the arrangement between the Hong Kong and mainland Chinese markets will undergo experimental operation.
The announcement came on a weekend in which Hong Kong and China marked the 20th anniversary of Britain´s handover of the southern Chinese financial centre back to Beijing in 1997.
In an announcement made on Monday, PBoC said that the bond connect was an important move for the central government to support Hong Kong´s development and promote cooperation between the mainland and Hong Kong. The PBoC also added that the move would promote Hong Kong´s long-term prosperity and stability and provide a more convenient investment channel for overseas investors. The bank also added that the move would steadily push forward the opening up of China´s financial market. The growing Chinese bond market has been virtually out of reach for foreign investors, who currently hold less than 1.5 percent of bonds issued in China, according to estimates by Bloomberg.
The new platform mirrors previously established link-ups between the share markets of Hong Kong and mainland China that now allow foreign and Chinese investors to buy shares in each other´s markets.
Those links give foreigners some access to China-listed shares, while also allowing Chinese firms to buy Hong Kong-traded stocks. The new bond connect scheme, however, currently only allows foreign investors to buy Chinese debt.
HSBC said it completed its first deal under the new arrangement as underwriter for a bond issue by Agricultural Development Bank of China. The move will help pave the way for China bonds to be included in major global bond indices in the future. China has for years faced foreign complaints about restricted access to her markets, but has recently made a series of liberalization pledges partly to expand its global market influence.
In June, leading index compiler MSCI said it would include Chinese shares in its global emerging-market indices, citing loosening restrictions on foreign ownership of Chinese stocks. After years of runaway growth, China is grappling with slowing economic expansion, and has moved to check massive capital flight by Chinese funds seeking better returns overseas while trying to lure more foreign investment.
Utilization of the new bond connect platform, however, could hinge on fears of mounting Chinese debt levels which have prompted warnings of a looming crisis and possible defaults. China has moved aggressively in recent months to rein in runaway credit.