Bond connect boost for yuan

Qualified overseas investors were able to invest in the Chinese mainland interbank bond market via the mainlandHong Kong bond connect program as of Monday. According to the “northbound” bond connect, which is now operating on a trial basis, qualified overseas investors can invest in bonds that are tradable on the mainland interbank bond market, including treasury bonds, local-government bonds, policy bank bonds, commercial bank bonds, corporate bonds and assetbacked securities. The “southbound” bond connect, via which mainland investors can invest in Hong Kong’s interbank bonds, is yet to be launched.

The “northbound” bond connect marks another important step in the opening up of China’s financial market and a milestone in the push for internationalization of the yuan.

The mainland’s interbank bond market has been promoting opening-up in recent years, but it remained a relatively closed environment. So far, a total of 473 overseas investors have entered the market, with an investment of more than 800 billion yuan ($117.85 billion). It is expected that the total overseas capital invested in the mainland’s bond market will increase to 6.8 trillion yuan in the next five years.

China’s bond market has offered investors almost the highest return ratio in the world. So the launch of the mainland-Hong Kong bond connect will provide foreign investors with a welcome channel to invest in this market. At the same time, the bond connect will also create a new financing channel for mainland enterprises.

Since the yuan was included in the International Monetary Fund’s Special Drawing Rights, the demand for yuan-denominated bonds has been growing. Given that buying Chinese bonds and the longterm holding of yuan-denominated assets by foreign investors will expand the yuan’s share as a world reserve currency, the latest bond connect will help further boost the yuan’s status and influence.