3 Key Factors to the China Hong Kong Bond Trading Link

Chinese authorities are finally opening to overseas investors. Monday morning marked a bond trading link opening event for China and Hong Kong. Officials from Hong Kong and mainland China clicked a bong to start the process. The event also marked the 20th anniversary of Hong Kong’s transfer to China from Britain. This is the first time China is making an effort to make overseas investors enter its markets. Here are three things that you should know about the trading link.


Overseas Investors Rejoice


International investors do not hold more than 2 percent of the $9.4 trillion value markets in China. It is the third largest market by value which has largely been close to foreign investors. Now, investors from Hong Kong will get northbound access to the Chinese markets. Onerous demands from the authorities will go down because of this trading link. As northbound access increases, investors from Hong Kong will be able to make direct investments into China. Other foreign investors can use Hong Kong as an indirect investment route into China.

Southbound Access to Hong Kong May Follow


The officials are still in talks about southbound access for Chinese investors into Hong Kong markets and beyond. China is still trying to ensure that investors do not let credit flow out of their nation. Chances are high that southbound investment will follow, but not anytime soon. If mainland investors create enough demand, southbound access may follow.

The Bond Connect program will help in creating an internationalized market that welcomes foreign investors. The country opened a two-way trading link for stocks between Shanghai and Hong Kong. Last year, the authorities also connected Hong Kong’s stock exchange with the mainland Shenzhen exchange. Now that the bond system is also in place, there could be further internationalization of the market.

Yuan May Depreciate


HSBC is one of the first market makers in the deal and will bring institutionalized investors into mainland China through Hong Kong. Asian markets remain mixed after the launch. Japanese markets gained after the launch, but it was predominantly because of the strong manufacturing numbers domestically. With new investments pouring in the market, there are chances that the Yuan may depreciate. Yuan remained steady against the US dollar. The PBC has already pegged the yuan against the USD at its highest levels since November 2016. With new investments, there could be dilution. Still, the PBC could try to maintain the high levels for at least this year.

Chinese authorities are slowly helping the economy make the shift from debt fueled economy to consumer based economy. More such policy decisions are apt to follow.


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