North-south bonds take time to connect

Editorial | 3 Jul 2017

A new era has dawned after Carrie Lam Cheng Yuet-ngor was sworn in as chief executive. Hopefully, her regime will be free of the disruptive rhetoric that dominated the five years of her predecessor, Leung Chun-ying.

On the last day of his visit here, President Xi Jinping spelt out four primary tasks for the new administration:

Work on the systems to uphold national sovereignty and security - a veiled reference to the SAR's delay in enacting an anti-subversion law in line with Article 23 of the Basic Law;

Enhance national education for the young;

Focus on development; and

Maintain a harmonious and stable social environment.

These are, each and everyone of them, tall orders, and it is too early to predict how Lam will fare in those four areas.

However, the public seems to be giving her the benefit of a doubt, since only some 60,000 people joined the July 1 march - a turnout claimed by organizer Civil Human Rights Front.

Meanwhile, police put the number of this year's protesters at 14,500 during the peak of the rally, while the University of Hong Kong's Public Opinion Programme estimated some 27,000 to 35,000 people joined the march.

This compared to 110,000 protesters last year claimed by the organizer, 19,300 at the peak said by police, and 23,000 to 29,000 people estimated by HKUPOP. Saturday's smaller-than- expected turnout should bode well for the SAR's first female chief executive.

The new era also begins with the commencement of the Bond Connect program. It may be curious the program was timed to start trading only after CY left office. The decision couldn't be accidental, and Lam may view it as a blessing from Beijing.

In the beginning, the connect is limited to "northbound" trading. While it isn't the first time investors based outside the mainland can trade in mainland bonds, it's the first time they can do so using the clearing facilities in Hong Kong in ways similar to the stock connects.

The Bond Connect is Beijing's latest step to open up its capital markets, which will broaden the use of the yuan to help internationalize it as a hard currency in the long term.

But the official announcement stopped short of indicating when "southbound" trading will start for mainlanders to buy and sell Hong Kong and overseas bonds. What's holding back the southbound vehicle? Could it be due to something technical, or fears of capital outflows?

By making bonds available to foreign capital through the connect program, China can use the SAR as a springboard to borrow money from the international community to finance domestic development and strategic initiatives like the "Belt and Road" initiative.

Theoretically, the potential for the mainland bond market to expand is huge.

China's bond market is currently about US$9 trillion (HK$70.2 trillion), of which less than 2 percent is owned by foreign capital. A UBS asset management report recently projected the country's bond sector to double in five years, to become the world's second largest bond market after the United States.

If China wants to tap foreign capital to meet domestic needs, trading must be simplified. The Bond Connect is meant to fill in the gap that other current programs cannot.

Nonetheless, it'll be unrealistic to expect the bond connect scheme to result in an immediate upswing. The process is likely to be slow despite the potential therein.

As with the stock connects, isn't northbound trading still accounting for less than 1 percent of the stock trading over there?

It takes a while to mature.

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