Bond Connect launch leans on Chinese bank support

Officially launched on Monday, China's newest capital market scheme, Bond Connect, had a mixed first day's trading, leaning heavily on Chinese institutions, market insiders say.

Foreign banks and asset managers are nonetheless circling, their collective interest piqued by the fresh possibilities offered for investing in the world's second-largest economy, while the scheme's first-ever primary bond issue was oversubscribed. 

Bond Connect recorded Rmb7 billion ($1.03 billion) of business on its first day from 142 trades, according to China Foreign Exchange Trade System. And about 90% of the trades occurred in morning hours, Becky Liu, Hong Kong-based head of China macro strategy at Standard Chartered Bank, said in a conference call.

A lot of the turnover on Monday involved banks testing the system, said Justin Chan, co-head of global markets for Asia-Pacific at HSBC, on another conference call. So some of the trades were between connected financial institutions rather than with new investors, he added. 

One Hong Kong-based bond fund manager reiterated that, telling AsianInvestor that many of the trades were between Chinese financial institutions and their subsidiaries in Hong Kong.

But the first day of business, while symbolic perhaps, offers few clues as to when others will join in. “Whether you invest today or tomorrow will not make a difference; you don't have a first-mover advantage [from] getting on [at] day one,” Chan said.

That is illustrated by JP Morgan Asset Management, which is in the process of registering for the programme and hopes to complete the process “as soon as possible”, according to Stephen Chang, the firm's head of Asian fixed income.

Agricultural Development Bank of China, a policy bank in China, issued a primary bond offering totaling Rmb16 billion to both domestic and foreign investors, with Rmb1 billion of that set aside for foreign investors able to subscribe via Bond Connect. 

The offshore sale, which comprised one-year and a three-year maturities, was oversubscribed 2.52 times, according to a statement posted on the People’s Bank of China’s website. The one-year and three-year issues paid a coupon of 3.65% and 3.99%, respectively -- chunky by developed market standards.

“In an environment where the renminbi is stabilised, the yield of the tranches are attractive for European investors,” Andy Seaman, chief investment officer of Stratton Street, a London-based asset manager, told AsianInvestor.

Varied interest

Interest in the Chinese bond market and, by extension, in the use of new modes of Chinese bond investing like Bond Connect vary by investor type.

Larger asset owners seem more reluctant to increase their exposures to China, even after gaining easier access to the market. That is partly due to their longer investment horizons and global allocations, which may make them more cautious towards China due to the country's efforts to develerage, or may mean their Chinese investments are just part of the broader EM allocation.

But for asset managers, especially for the emerging market or Asian bond managers, China's onshore bond market is just too big to ignore.

When it comes to deciding which access channel to choose, and/or how much to allocate to each one, it usually depends on their strategies and the operational efficiency of different schemes. Global investor monitoring and testing for the new China access programme is only just beginning.

Both JP Morgan AM's Chang and Jean-Charles Sambor, deputy head of emerging markets debt at BNP Paribas Asset Management, said they are already quite familiar with the Chinese bond market, so to undertand the mechanisms of the Bond Connect scheme are not a big issue for them.

Sambor said his firm is finalising its first direct investment into China's onshore bond market. Using Bond Connect is just one choice among others, depending on the investment risk appetite and how much desire one has to be exposed to genuine onshore risk.

Chang said he will use Bond Connect but exactly how and the extent to which JP Morgan AM does so in future will depend on the sustainability of the programme's trading, whether there are "enough people quoting the bonds" and whether "people are still able to provide liquidity on a volatile day."

London-based Seaman said his firm is not planning to use Bond Connect at the moment because his renminbi fund’s strategy is to buy dollar-denominated bonds and hedge them into offshore renminbi.

Perhaps to lure more investors outside of Asia into using Bond Connect there are some issues that need to be addressed first, Sally Wong, chief executive of the Hong Kong Investment Funds Association, told AsianInvestor. Among these issues, she said, is the availability of currency hedging tools on Bond Connect, greater clarity around withholding taxes, language improvements in bond disclosures, and better local credit ratings.

Also, some fund mangers such as the UCITS funds need to get the regulatory approval from their home jurisdictions if they want to invest though Bond Connect. That requires greater testing and understanding of how the scheme plays, Wong said.