Reuters logo
in 16 days
Fitch: Bond Connect Supports China's Efforts to Boost Inflows
July 5, 2017 / 3:45 AM / in 16 days

Fitch: Bond Connect Supports China's Efforts to Boost Inflows

12 Min Read

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, July 04 (Fitch) The "Bond Connect" scheme that provides a new channel for foreign investors to access China's onshore interbank bond market (CIBM) is another example of the authorities' recent efforts to encourage portfolio inflows, and may help put renminbi internationalisation back on track after a lack of progress in recent years, says Fitch Ratings. The scheme, launched on 3 July, is part of broader government reforms to open up China's onshore bond market, the third largest in the world after the US and Japan. Since February 2016 foreign institutional investors approved by the regulator have had access to CIBM through the CIBM Direct scheme which imposes no quota limitations or restrictions on repatriation, unlike previous schemes. Foreign participation in China's bond market has risen in response to this liberalisation, but remains low by regional standards. Foreign holdings of Chinese government bonds had increased to 3.9% by end-May 2017, up from 3% a year earlier, while external holdings of policy financial bonds had risen to 2.3% from 1.7%. Foreign participation in the total onshore market is even lower. In comparison, the share of government bonds held externally was 25.6% in Malaysia, 10.5% in Korea and 10.5% in Japan, according to the Asian Development Bank. The Bond Connect scheme should facilitate higher foreign ownership of onshore bonds over the medium term. Bond Connect's main advantage over CIBM Direct is that regulatory approval is not required to invest in fixed-income products in CIMB. Foreign institutional investors only need to set up a Bond Connect account with a participating Hong Kong bank. Investors will convert foreign currency to offshore yuan (CNH) to invest in onshore bonds. The scheme will also allow investors to use a familiar online platform to trade in the CIBM. Improved foreign access to the onshore bond market may encourage wider inclusion of Chinese bonds in major indices, which could further boost foreign investment. Bond Connect should also bolster growth of fixed-income professionals capable of selling Chinese securities to foreign investors, which will be important in expanding foreign participation. However, the government is likely to continue to tread carefully over broader capital account liberalisation, given the potential risks that net outflows could pose to financial stability. Accordingly, Bond Connect does not yet allow Chinese investors to buy overseas bonds - it is north-bound only - which is in keeping with our view that the authorities will remain cautious towards removing outflow restrictions, while loosening those on inflows only gradually. Bond Connect also limits foreign investors' ability to engage in onshore currency arbitrage, restricting access to onshore rates and FX derivatives. Bond Connect investors can instead hedge Chinese treasury rates through the Hong Kong Exchange and offshore FX rates via the OTC market. However, trading costs associated with offshore instruments can be high, and will be influenced by investors' views on CNH. Portfolio liquidity management will be important to Bond Connect investors as repurchase agreements cannot yet be conducted through the scheme. As such, we expect funds to be invested primarily in liquid instruments, such as government bonds, policy bank bonds and negotiable certificates of deposit. Bond Connect investors will have access to state-owned unlisted 'enterprise bonds' traded on the CIBM, but not to corporate bonds issued in the exchange markets. Hong Kong banks participating in Bond Connect are likely to generate additional fee and FX income, but could also face increased operational risks and costs, owing to compliance, reporting and trade-settlement obligations. Larger banks could purchase and sell bonds via Bond Connect as part of their balance-sheet management, but we do not expect this to result in a significant increase in system-wide mainland China exposure. Contact: Wayne Lai, CFA, CMT, FRM Associate Director Corporates +65 6796 7219 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Stephen Schwartz Senior Director Sovereigns +852 2263 9938 Veronica Lau Director Financial Institutions +852 2263 9924 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below