As Hong Kong began its first trading day on Monday, 3 July, following the celebrations marking the 20th anniversary of the establishment of the Hong Kong Special Administrative Region, the main lobby of the Hong Kong Exchanges and Clearing Limited was packed with guests. In a ceremony witnessed by Hong Kong’s new Chief Executive and hundreds of other dignitaries and media representatives, I firmly beat a gong three times together with Mr Pan Gongsheng, the Deputy Governor of the People's Bank of China who was in town specifically for the occasion, marking the formal launch of the trial operation of the Bond Connect scheme. Bond Connect is a milestone for the mutual access of capital markets between the Mainland and Hong Kong. After the ceremony, a colleague asked why I banged so hard on the gong, I simply quoted a Chinese saying, "big efforts yield good rewards".
Indeed, Bond Connect commenced transaction and settlement only four months after it was announced by Premier Li Keqiang in March, thanks to two years of hard work by the various relevant authorities and departments on the Mainland and in Hong Kong. As the HKMA is the lead authority from Hong Kong, our colleagues travelled frequently to the Mainland for all the initial preparatory work, and went into overdrive especially in the run-up to the launch. These unsung heroes are to be applauded for making the trial operation a success!
Hong Kong has long been the launch pad for piloting new measures over the course of the Mainland’s financial opening-up, and also the bridge connecting the Mainland and international capital markets. From the introduction of the Shanghai-Hong Kong Stock Connect in 2014, the Shenzhen-Hong Kong Stock Connect in 2016 to the launch of Bond Connect on Monday, Hong Kong has served as a platform connecting investors from the Mainland and the rest of the world. The expansion of mutual access from the stock markets to the bond market again highlights Hong Kong’s unique role as a financial intermediary in facilitating global investors’ access to the Mainland’s financial markets.
To perform our function as a financial intermediary effectively, we must ensure funds flow smoothly through efficient and safe conduits, which in turn requires the development of sound and robust financial infrastructure – akin to the building of physical highways and bridges. Yet no financial infrastructure can be built overnight. Success depends on a forward-looking and holistic vision. The involvement of the Central Moneymarkets Unit (CMU) in Bond Connect is the latest example of this. Established by the HKMA in 1990, CMU has provided investors with efficient, secure and convenient bond settlement services over the years. It now serves some 200 members, including local and global banks, trust companies and custodians.
CMU’s track record of convenient and reliable service has gained confidence of global investors. The selection of CMU to provide settlement and custody services for Bond Connect allows global investors to use familiar highways whilst adding a new road reaching into the Mainland bond market, which provides convenience and greater flexibility for investors to manage their bond investments.
The Mainland bond market follows the direct holding arrangement for bond registration and custody, which differs from the nominee holding arrangement in Hong Kong and most overseas markets. Through CMU, international investors can continue to settle and hold bonds using familiar practices, whilst obviating the need for the Mainland bond market to make any fundamental change to its existing mechanisms. This reflects the unique advantage of Hong Kong as a hub for financial intermediation for mutual access with the Mainland markets.
Northbound Trading, which was launched first under Bond Connect, has been running smoothly during the first few trading days of its trial operation. We will continue to closely monitor its operation, draw experience and make refinements where necessary. Some may wonder how much capital will be attracted via Bond Connect. No doubt many will hope funds will flood in, but like any newly constructed bridges or roads, there is always a process for observation, familiarisation and adaptation during the initial stage. When I look at this from the perspective of market infrastructure development, I focus more on whether, in the long run, Bond Connect can promote bond market development in both Hong Kong and the Mainland, and bring mutual benefits to the two economies; and whether it can further enhance Hong Kong’s status as an international financial centre. I have always believed that as long as the bridges and roads are well-built, and the two markets are mutually accessible, we should not worry about lacking investment flows. The launch of Bond Connect will greatly enhance investors’ demand for cross-border settlement, custody, asset management, risk management and other financial services, which will in turn create more high value-added jobs in Hong Kong.
Mainland China has the world’s third largest bond market after the US and Japan. The outstanding amount of bonds under custody in the Mainland bond market amounts to RMB67 trillion while foreign investors hold less than 2%. This shows there is enormous potential for future growth. Indeed, while preparing this article, the Mainland announced a substantial increase in Hong Kong’s Renminbi Qualified Foreign Institutional Investor (RQFII) quota from RMB270 billion to RMB500 billion, demonstrating its continued efforts to promote the internationalisation of the renminbi. Together with the launch of Bond Connect, I believe the number of foreign investors entering the Mainland capital markets through Hong Kong’s platform will further increase in the future. This will be conducive to enhancing Hong Kong’s status as an offshore renminbi centre.
Hong Kong Monetary Authority
6 July 2017