On September 15, 2021, the People’s Bank of China (PBC) issued the Notice on Launching Southbound Trading under Mutual Bond Market Access between the Mainland and Hong Kong (hereinafter referred to as the Notice). PBC officials answered press questions on the Notice.
1. How is the performance of Northbound Bond Connect since it was launched four years ago?
In July 2017, in line with the decision of the central government, the PBC launched Northbound Trading under the Bond Connect scheme in collaboration with the Hong Kong Monetary Authority (HKMA) and other relevant parties.
Since then, holdings of Chinese bonds by overseas investors have increased at an average annual rate of over 40 percent to reach the current volume of approximately RMB3.8 trillion, as compared with the RMB850 billion before the launch of Northbound Bond Connect. Specifically, Chinese bonds held by overseas investors via Northbound Bond Connect now amount to about RMB1.1 trillion, posting a cumulative turnover of RMB12.3 trillion for the past four years. Of the world’s top 100 asset management institutions, 78 have participated in the scheme.
As proved by practice, Northbound Bond Connect, operating stably and efficiently with increasingly active trading, has become an important channel for overseas institutions to enter the Mainland bond market. The scheme has been well received and regulatory cooperation between the Mainland and Hong Kong is going on smoothly. In particular, while Northbound Bond Connect adopts common international practice, such as multi-level custody, to provide convenient access for overseas institutions, a series of arrangements, such as penetrating information collection, have been put in place based on China’s realities in order to effectively support supervision and risk prevention.
2. What are the major considerations for launching Southbound Bond Connect now?
General Secretary Xi Jinping has repeatedly stressed the requirement that concrete steps be taken to fulfil the tasks of financial reform and opening-up and that new reform measures be introduced to expand high-standard two-way opening-up of the financial markets in line with changing international economic and financial situations as well as the strategic needs of China’s development.
Due to various factors, Southbound Trading was not launched together with Northbound Trading under Bond Connect in 2017. Over the past four years, the PBC has been concerned about the development of the Hong Kong bond market and has maintained close contact with the HKMA on the formulation of a feasible plan for Southbound Bond Connect.
Launching Southbound Bond Connect in due course according to the decision and arrangements of the central government will be conducive to improving the institutional arrangements for the two-way opening-up of China’s bond market and further expanding for Chinese investors the room of asset allocation in the international financial markets. It will also help consolidate Hong Kong’s status as a gateway and hub linking the Mainland and global markets, integrate Hong Kong into the big picture of national development, and maintain long-term prosperity and stability in Hong Kong.
3. What is the overall operation framework of Southbound Bond Connect?
So far, financial institutions on the Mainland can independently “go out” to allocate bonds globally. Southbound Bond Connect doesn’t alter the current policy framework of the Mainland and Hong Kong. With enhanced cooperation between financial infrastructure services providers of the two places, this scheme provides an easy access for institutional investors on the Mainland to “go out” for bond allocation. Eligible bonds are those issued offshore and tradable in the Hong Kong bond market. Cash bond trading will be available in the initial phase.
Similar to Northbound Trading, Southbound Bond Connect adopts the internationally-accepted nominee holding structure. Under such structure, registration and settlement institutions and custodian & clearing banks provide bond custody and settlement services for Mainland investors by opening nominee accounts in Hong Kong.
4. Which institutions are participating in Southbound Bond Connect?
Eligible Mainland investors are designated tentatively as 41 banking financial institutions on the list of the 2020 PBC primary dealers for open market operations (non-banking institutions and rural financial institutions not included). Qualified Domestic Institutional Investors (QDIIs) and Renminbi Qualified Domestic Institutional Investors (RQDIIs) are also eligible for offshore bond investment via this arrangement. Market makers for Southbound Bond Connect designated by the HKMA will act as trading counterpart tentatively.
Financial infrastructure services providers refers to financial infrastructures and custodian & clearing banks that provide basic services such as registration, depository, custody, trading, settlement and clearing for Southbound Bond Connect. Financial infrastructures include China Foreign Exchange Trading System (National Interbank Funding Center), China Central Depository & Clearing Co., Ltd., Shanghai Clearing House, Cross-border Interbank Payment and Settlement Co., Ltd., Hong Kong Exchanges and Clearing Limited, and HKMA Central Moneymarkets Unit. The first batch of domestic custodian & clearing banks include the Industrial and Commercial Bank of China, Bank of China and China CITIC Bank.
5. How risks of cross-border capital flows are managed under Southbound Bond Connect ?
Southbound Bond Connect achieves closed-loop management of funds with the design in every step of transaction, custody, clearing and remittance, and strengthens penetrated regulation and monitoring by the reporting of transaction and custody data and other methods.
In terms of quota management, as stipulated in the Notice, the upper limit of net outflows under the scheme shall not exceed the annual quota and daily quota. At present, the annual quota and daily quota for Southbound Bond Connect are equivalent to RMB500 billion and RMB20 billion respectively. The PBC will adjust the quotas based on the developments of cross-border capital flows.
The QDIIs and RQDIIs participating in the Southbound Bond Connect should follow the prevailing management rules, and their net outflow of cross-border funds are not included in the quota of the Southbound scheme.
