Will Bond Connect hurt the CNH market?

Rating agency Moody’s says offshore renminbi bonds will be marginalised by the imminent China-Hong Kong trading link. Andy Seaman of Stratton Street Capital disagrees.
Will Bond Connect hurt the CNH market?

Opinions vary widely about the likely impact of the upcoming Bond Connect scheme, which will allow international investors to trade onshore bonds in Hong Kong.

For instance, rating agency Moody’s takes the view that the trading link, expected to go live in July, will prove very attractive and ultimately marginalise the offshore renminbi bond (CNH, or dim sum) market.

The firm said in a research note yesterday that international investors were more likely to invest onshore because of the much larger scale, diversity and secondary market liquidity in the domestic Chinese (CNY) market. It added that the benefits of the CNH market in terms of trading and mobility of funds would be diminished.

A Hong Kong-based fixed income analyst at a big bank agreed that the offshore RMB bond market would be marginalised over time as the onshore market offered much greater liquidity. 

"Benefits of both"

Not so fast, countered Andy Seaman, chief investment officer of London-based Stratton Street Capital, which runs RMB bond strategies.

He made a comparison with the eurodollar market, referring to US dollar-denominated deposits at banks outside America. “There are no taxes, and it’s very transparent."

The dim sum market is likely to develop along similar lines, allowing access to RMB assets outside China without concerns about taxes that might be levied, he told AsianInvestor. “I would have thought that both [CNH and CNY] will grow, as they serve different purposes.”

What’s more, there is the potential for arbitrage between the two markets and taking advantage of pricing differentials.

“Assume there are two identical credits with the same maturity in both markets,” noted Seaman. “Because CNY and CNH trade at different prices, you would have an incentive to buy offshore if CNH is trading at a discount to CNY.”

An easier option

Meanwhile, Seaman agreed with Moody’s on the apparent attractiveness of Bond Connect. He said he was likely to use the scheme because it did away the issue of having to apply for quota before you know how much demand there would be for a product – as is the case under the existing QFII and RQFII cross-border schemes.

“[Bond Connect] will make things an awful lot easier: you can increase your allocation as demand comes through,” he noted. “And if [the scheme’s quota] is not going to be limited, then presumably it will be better for bigger investors as well.”

Barnaby Nelson, head of investors and intermediaries for Northeast Asia at Standard Chartered Bank, confirmed that he had seen strong appetite for Bond Connect from most investors. 

All that said, Seaman noted, it will only be entirely clear how the scheme will operate once the details are announced.

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