On Wednesday (September 15), the people's Bank of China and the Hong Kong Monetary Authority jointly announced that the Bond Link "Nanxiangtong" will be officially launched on September 24.

Industry insiders believe that as a channel for domestic institutions to "go out" to invest in the overseas bond market, the landing of the "southbound Link" has further accelerated the internationalization of China's bond market. The official launch of the "Nan Xiangtong" Bond Link will bring historic opportunities to market players, including domestic investors and international financial institutions.

What is meant by "Nanxiangtong"?

According to a notice issued by the people's Bank of China, "Nanxiang Tong" refers to the institutional arrangement for mainland institutional investors to invest in Hong Kong's bond market through the connection between the mainland and Hong Kong's basic service institutions.

What can Nanxiangtong buy?

Domestic investors who meet the requirements of the people's Bank of China can invest in bonds through Nanxiangtong, and the underlying bonds are all types of securities issued abroad and traded in the Hong Kong bond market, the notice said.

In terms of the amount of investment, according to the announcement, the upper limit of the net outflow of cross-border funds from the "southbound Link" shall not exceed the annual total amount and the daily quota. At present, the annual total quota of "Nanxiangtong" is 500 billion yuan equivalent RMB, and the daily quota is 20 billion yuan equivalent RMB. The people's Bank of China adjusts the annual total quota and daily quota of "Nanxiangtong" according to the situation of cross-border capital flows.

How does "Nanxiangtong" operate?

With regard to the overall operational framework of the "southbound Link", the people's Bank of China said in response to a reporter's question that at present, mainland financial institutions can independently "go out" to allocate global bonds.

Nanxiangtong did not break through the current policy framework of the mainland and Hong Kong, mainly by strengthening cooperation between the basic service institutions of the bond markets of the two places to provide a convenient channel for mainland institutional investors to "go out" to allocate bonds. The scope of investment of the southbound link is bonds issued abroad and traded in the Hong Kong market. In the initial stage, "Nanxiang Tong" first opened the trading of existing securities.

Like the "northbound", "Nanxiangtong" has also adopted the internationally accepted nominal holder system. Mainland bond registration and clearing institutions and custodian clearing banks provide bond escrow and settlement services for mainland investors by opening nominal holder accounts in Hong Kong.

How does Nanxiangtong manage the risk of cross-border capital flows?

Through the design of trading, custody, settlement, exchange and other links, "Southbound Link" realizes closed-loop management of funds, and strengthens penetrating supervision and monitoring by means of transaction escrow data reporting.

What are the organizations participating in the "southbound Link" at this stage?

In response to a reporter's question, the people's Bank of China said that mainland investors are tentatively designated as 41 bank financial institutions (excluding non-bank financial institutions and rural financial institutions) among the primary dealers in the open market business of the people's Bank of China in 2020. Qualified domestic institutional investors (QDII) and RMB qualified domestic institutional investors (RQDII) can also invest in overseas bonds through Nanxiangtong. The counterparty to the transaction is tentatively designated as the "Nanxiangtong" market maker designated by the Hong Kong Monetary Authority.

The institutions that provide basic services such as bond registration, depository, custody, trading, settlement and clearing for Nanxiangtong include the relevant financial infrastructure and custodian clearing banks of the two places. Among them, the financial infrastructure includes China Foreign Exchange Trading Center (National Interbank loan Center), Central National debt Registration and Clearing Co., Ltd., Interbank Market Clearing House Co., Ltd., Cross-Border Interbank payments and Clearing Co., Ltd., Hong Kong exchanges and Clearing Limited, the Central Clearing Unit of the Hong Kong Monetary Authority The first batch of domestic custodian and clearing banks are Industrial and Commercial Bank of China, Bank of China Ltd. and China CITIC Bank Corporation.

What is the impact of the market?

The people's Bank of China said that at present, mainland financial institutions can independently "go out" to allocate global bonds. Nanxiangtong did not break through the current policy framework of the mainland and Hong Kong, mainly by strengthening cooperation between the basic service institutions of the bond markets of the two places to provide a convenient channel for mainland institutional investors to "go out" to allocate bonds.

Tianfeng Securities previously proposed in the research report that after the implementation of the "South Xiangtong", the interconnection between the mainland and Hong Kong will be further improved, and mainland investors will have diversified asset allocation channels. The emergence of "southbound Link" will provide mainland investors with a richer choice of investment targets, meet their demand for going out, and improve the flexibility of asset allocation and return on assets of domestic institutions. Break the current situation that the channels for mainland institutions to invest abroad are relatively limited, there are many restrictions on the choice of transactions for funds under the main channel QDII/RQDII, and mainland investors cannot choose their own varieties and trading times when investing in the Hong Kong bond market, and have a low degree of participation in foreign markets. Hong Kong's status as an international financial center will also be further strengthened, and the process of RMB internationalization will be effectively promoted.

Chang Zheng, head of Oriental Jincheng International team, said that on the basis of the successful operation of "North to Tong", "South to Tong" will be of great significance.

On the one hand, the opening of "Nan Xiang Tong" provides another way for domestic investors to allocate assets globally, and it also helps domestic investors to use the Hong Kong market to manage and hedge credit risks globally. Mainland investors are free to choose the type of bond trading in Hong Kong and decide when to trade.

On the other hand, the opening of the "southbound Link" means the real realization of two-way connectivity between the mainland and Hong Kong, which will promote cross-border regulatory cooperation between the two places, promote the gradual convergence of market regulatory standards, and further enhance the internationalization of settlement registration, credit rating, information disclosure and other related systems in the domestic bond market.