According to a joint announcement issued by the people's Bank of China and the HKMA, Bond southbound (Nanxiangtong) will be launched next Friday (September 24) to promote the common development of the bond markets in the mainland and Hong Kong. According to the HSBC Global Research report, the strategic importance of southbound to HKEx is greater than its actual impact on its revenue, promoting connectivity between China and Hong Kong, thereby strengthening the links between institutional investors and Hong Kong's financial market, maintaining its "buy" rating and target price of $564.
According to the preliminary plan, Nanxiangtong has an annual quota of 500 billion yuan and a daily quota of 20 billion yuan, and all tradable bonds in Hong Kong will be included in the plan. The HKMA has indicated that after the southbound link operates smoothly, it will gradually expand the range of eligible investors and gradually add more market makers.
According to the notice announced by the people's Bank of China, the underlying bonds refer to all types of bonds issued abroad and traded and circulated in the Hong Kong bond market. Domestic investors can participate in the issuance and subscription of overseas bonds through Nanxiangtong, but they are not allowed to illegally arbitrage foreign exchange. After the maturity or sale of the invested bonds, if the domestic investor no longer continues to invest, the relevant funds shall be remitted back to China and converted back into RMB.
41 banks from Chinese mainland and foreign banks qualified for qualified domestic Institutional Investor (QDII) and RMB qualified domestic Institutional Investor (RQDII) can all participate in China Southern Communications, while Industrial and Commercial Bank of China (01398.HK), Bank of China Ltd. (03988.HK) and China CITIC Bank Corporation (00998.HK) are appointed as onshore Chinese custodian banks.
However, HSBC estimates that even if the southbound link is opened, it will not have a significant impact on HKEx's revenue because the size of Hong Kong's bond market is much smaller than that of the mainland. Hong Kong's outstanding bonds totaled $556 billion by the end of 2020, equivalent to 3 per cent of the $18.56 trillion bond market in mainland China, according to the Bank for International Settlements (BIS). As of the end of last year, the HKEx had a total of 1574 listed bonds (of which 75 were renminbi bonds). For the whole of last year, the total turnover of bonds was only HK $65.5 billion (well below the HK $25.7 trillion of Hong Kong stocks).
HSBC believes that the strategic importance of southbound to HKEx is greater than its actual impact on its revenue, but it is beneficial to Bank of China Ltd. H, BOC Hong Kong (Holdings) Limited (02388.HK) and Bank of East Asia (00023.HK), with a target price of RMB3.9,27.8 and RMB16.8 respectively, with a "buy" rating for all three.
The northbound link was opened as early as July 2017, while the southbound link will not give the green light until September this year because of the protection of mainland investors. Foreign investors' holdings of mainland bonds have risen to 3.8 trillion yuan, up 3.5 times from before the opening of northbound, with an average annual growth rate of more than 40 per cent, according to the people's Bank of China. Among them, the amount of debt held by foreign investors in Beixiang Tong is about 1.1 trillion yuan.
According to Mr Liu Yingbin, Deputy Chief Executive of the HKMA, there are two channels for settlement, one of which is through a link with the Central Moneymarkets Unit (CMU) of the HKMA. As it takes time for the system to develop new currencies, only RMB and Hong Kong dollar bonds will be covered initially through this settlement path. As for the other way is the custodian bank connection path, you can invest in bonds in any currency.
The HKMA mentioned that China Southern Communications can invest in RMB and foreign exchange, and investors who use RMB to invest in foreign currency bonds can conduct capital exchange and related foreign exchange risk hedging business through the mainland interbank foreign exchange market.
Responsible for the operation of Southern Communications is Bond Link Limited (BCCL), a joint venture between China Foreign Exchange Trading Center and HKEx to support Bond related trading services. BCCL charges transaction service fees for each access platform.
(Xiaoping)