Bonds ‘through train’ next on the table
FSDC plan seen to offer more investment channels for cross-boundary bond markets
Hong Kong is mulling the possibility of a bonds-trading link with the Chinese mainland, betting on strengthening cross-boundary “bonds”, underpinned by the upcoming Shenzhen-Hong Kong Stock Connect, which will kick off on Monday.
In a report released on Tuesday, the Financial Services Development Council (FSDC) spoke of a proposed “through train” connecting the Hong Kong and mainland bond markets.
The plan comes on the heels of last week’s announcement that the long-anticipated second stocks “through train” between the SAR and the mainland — the ShenzhenHong Kong Stock Connect — will be launched on Dec 5.
If the proposal materializes, it would mark yet another step forward by the world’s secondlargest economy in opening up its financial markets.
George Leung Siu-kay — a member of the FSDC’s Opportunities Committee and an Asia-Pacific advisor for HSBC — believed that a bonds connect is “a matter of investment option” as investors have long been beset by limited investment channels between the cross-boundary bond markets.
Ma i n l a n d i nv e s t o r s a r e allowed to invest in offshore stock and bond markets under the Qualified Domestic Institutional Investor (QDII) program and the Mainland-Hong Kong Mutual Recognition of Funds initiative.
However, as of the first half of the year, debt funds only accounted for no more than 3 percent of the existing $90-billion QDII quotas.
Although it has been a year since Beijing approved the sale of investment products by Hong Kong funds on the mainland, only six such funds have so far been given the green light following two rounds of review by the China Securities Regulatory Commission. According to the FSDC, merely two of these funds are used for investing in fixed-income products.
Currently, the mainland’s bond market is the third-largest globally, with an $8.7-trillion depository balance, but it remains closed to the outside world and is dominated by institutional investors, Leung noted.
He said this is where a bonds link could come in by offering more choices for cross-boundary retail investors, thus pushing for the further opening-up of the country’s capital market and increasing liquidity in Hong Kong’s bond market as well.
With the two cross-boundary stock connects serving as prime examples, FSDC senior advisor Esmond Lee believed that Hong Kong and the mainland are well-prepared for a bonds-trading link in terms of technology, infrastructure build-up and operational management.
For exchange-traded bonds, the SAR government body suggested the adoption of the prototype of the Stock Connect, while for over-thecounter-traded bonds, which are the mainstay of the Hong Kong and mainland bond markets, a “bonds connect” account with a designated bank would be necessary.
A “bonds connect” account could also help trace crossboundar y capital investments in the Hong Kong and mainland bond markets, as it’s always not easy for overthe-counter-traded bonds to be repatriated to their origins after the sale of cross-boundary bond investments.
Lee said this is particularly true with the yuan’s continued depreciation having triggered a fresh bout of interest in offshore bonds among mainland investors.
Leung shrugged off worries that a weakening yuan may dampen investors’ enthusiasm in mainland bonds, saying that fixed-income products will always have a role to play in diversifying investors’ portfolios and reducing their risk exposure.
Jacob Zhou, a Hong Kongbased analyst with one of the “Big Four” accounting firms, told China Daily he doesn’t think that capital outflow pressures would make mainland regulators eschew a crossboundary bonds connect.
“The point is that it’s always better to offer some regulated channels for people to invest overseas rather than to allow money to flow out of the boundary through unregulated ways.
“Things like a stock connect or a bonds connect are always good ideas. With mainland capital markets tuned to opening up further, undoubtedly, we’re going to see more such links on the way,” Zhou said.
Things like a stock connect or a bonds connect are always good ideas. With mainland capital markets tuned to opening up further, undoubtedly, we’re going to see more such links on the way.”
Hong Kong-based analyst with one of the “Big Four” accounting firms
It’s convenient for Tsui Wah Holdings Ltd — Hong Kong’s largest casual dining chain — to blame rising wages and rents for its decline. But, stock analysts who have been following the catering sector said the company’s problem lies in its outdated business model which, they argued, is no longer relevant in today’s information age.
Earlier this week, publiclylisted Tsui Wah posted a yearon-year, 48-percent drop in profit to HK$42.23 million for the first half of the fiscal year ending March 31, 2017. Tsui Wah said that af ter a shareholding reshuffle, its controlling shareholder had canceled an earlier plan to sell the company.
The company has said it would focus on opening up smaller restaurants, ostensibly, to compe te with the independent caterers that have sprouted up in various newly gentrified residential and commercial districts. But, analysts are unconvinced that smaller Tsui Wah outlets can help it win back its lost customers.
Tsui Wah’s declining popu l a r i ty c a n b e a tt r i b u t e d , at least partly, to the many culinary websites that have given independent eateries free publicity and made it easier for curious diners to find them. While competing with these caterers, Tsui Wah may enjoy a price advantage, but its largely standardized menu and service offer little appeal to the patrons of its potential rivals.
While competing with these caterers, Tsui Wah may enjoy a price advantage, but its largely standardized menu and service offer little appeal to the patrons of its potential rivals.”
At the lower end of the scale are the Chinese fastfood chains that are already encroaching upon the market segment used to be dominated by Tsui Wah, by serving food of comparable quality and at lower prices. Cafe de Coral — the largest local fastfood chain that’s also troubled by escalating wages and rents — has done considerably better than Tsui Wah.
Cafe de Coral posted a profit of HK$232 million on sales of HK$3.89 billion for the six months ended Sept 30 — up 11.8 percent and 4.3 percent, respec tively, from the period a year earlier. The company said it plans to open another 25 outlets in Hong Kong before the end of the fiscal year.
Squeezed between the independent caterers and t h e f a s t - f o o d c h a i n s , Ts u i Wah would need to revise its business strategy, no matter how well it had worked for the company in the past. But, before it can produce a credible plan, investors are welladvised to look elsewhere.