Corporate Financing Analysis - Chinese Bond Markets Opening Up Via Hong Kong - 10 JULY 2017

Chinese stocks have been thrust into the limelight over the past couple of years thanks to Beijing opening up access to international investors via the offshore Special Administrative Region (SAR) of Hong Kong, but local bonds could soon start to push these investors out. Against the backdrop of the ongoing financial and economic integration between Hong Kong and the Chinese mainland, which at the decree of Beijing has accelerated over the recent years, we are on the eve of the next major development in the internationalisation of the local currency and China's opening up to international capital investors with the launch of the 'Bond Connect'. Indeed, last month the People's Bank of China (PBoC) launched guidelines on trading the China interbank bond market CIBM via Bond Connect and, with the operational details confirmed, the gateway is set to launch this month. The proposed development will see the linking of debt capital markets (dcm) in the two regions for the first time and will give international investors the opportunity to trade local bonds - on top of the equities provided by 'Stock Connect' - without needing approval to operate and invest in the mainland. We highlight that, while such an event is significant on a qualitative basis, the process of overseas investors investing in offshore Chinese bonds in Hong Kong will be more gradual on a quantitative basis, rather than a case of the floodgates opening and a wave of investment rushing in.

Equities Success

China's equity capital market (ecm) arena is already the second largest globally behind the US and overseas investors have long been eager to tap into its deep pool of liquidity. That chance came when the window was opened back in November 2014 with the launch of the Shanghai-Hong Kong stock connect, which for the first time enabled overseas investors to tap into the stocks of companies on the Chinese mainland and mainland investors to participate in Hong Kong listed equities. For Hong Kong itself, it was able to benefit in several areas such as increased market capitalisation and increased fees from Chinese firms seeking to raise capital and related trading activities. For China, domestic firms were able to increasingly tap equity financing to grow their businesses. This was followed by the launch of the Shenzhen-Hong Kong Stock Connect at the end of 2016. As a result of these developments the Chinese mainland and the offshore resort in Hong Kong have enjoyed similar success in the equities arena with the MSCI, of which Offshore Chinese equities now make up 28.55% of the MSCI Emerging Market Index, the single largest share of any nation, followed by South Korea with 15.27% and Taiwan with 12.07% - according to MSCI data. In comparison, Chinese A-shares make up just 0.73% of the Index.

Offshore China's Share Growing
Global - MSCI Emerging Markets Index
Source: BMI, MSCI

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