Bond market link with the Mainland helps overcome Hong Kong's disadvantage

  At a press conference at the end of the 5th annual session of the 12th National People's Congress (NPC) yesterday, Premier Li Keqiang said the central government would continue to enhance its support for Hong Kong's development and probe to open up the country's bond market, making preparations to establish a bond market link between the Mainland and Hong Kong.  This move is of great significance, suggesting that, while global financial markets remain unstable, China will continue to orderly promote opening up of its capital market so as to release reform momentum to support long-term sustainable development.  More importantly, the RMB60-trillion-worth Mainland bond market, which is the third largest in the world, going to the world arena will bring great changes to the global bond market pattern.

  The fact that the Mainland-Hong Kong market connection mechanism is swiftly copied from the stock markets to bond markets shows that the further deepening of financial cooperation between the two places promotes the integration of the two places' capital markets.  In fact, a Mainland-Hong Kong bond market link is mutually beneficial for win-win, a bond market link between the Mainland and Hong Kong which not only helps the Mainland bond market go global but also strengthens Hong Kong's bond market.  So much so that cross-boundary two-way investment in bonds may exceed that in stocks at any moment in future.  The bond market link's potential for development is enormous.  It will not only help overcome Hong Kong's disadvantage of having a strong stock market but a weak bond market, but also inject new dynamic into Hong Kong's financial industry to strengthen the SAR's status as an international financial hub.

  The United States' economic and trade policies remain unclear, the United Kingdom is still in the midst of the Brexit turmoil, and several European countries are running general elections.  All such factors result in continuous turbulence in global stock, foreign exchange and bond markets.  But China unflinchingly persists in its reform and opening up and will never turn back.  As Premier Li Keqiang said in his Government Work Report, China will stick to the reform leading to the establishment of a market-oriented renminbi (RMB) exchange rate mechanism and maintain RMB's stable position in the global monetary system.  The implication is, China will expand the circulation volume of RMB in the global markets.  Given that RMB exchange rate tends to stabilise recently and in order to cooperate with the development of the One Belt One Road strategy, it is a good time to launch a bond market link between the Mainland and Hong Kong.

  For the development of Hong Kong's financial industry, it is more pressing to launch a bond market link than to launch a commodity market link, a currency market link or any new stock market link.  First of all, this will activate Hong Kong's bond market and enable it to have a greater variety of financial products.  Hong Kong's market of fixed-yield products such as bonds always remains not active, falling behind its rivals in the region such as Singapore.  With the establishment of a bond market link with the Mainland, more Mainland and foreign enterprises are expected to issue RMB bonds and related financial products in Hong Kong, opening a new investment channel.

  Secondly, it will boost Hong Kong's RMB asset management business.  Hong Kong's financial industry needs upgrading and restructuring to make it not only the place of first choice when Mainland enterprises consider to raise funds by going public, but also to develop into a risk management centre for Mainland assets.  As wealth accumulates rapidly in the Mainland in recent years, the demand for asset allocation in overseas markets steadily grows.  Moreover, Hong Kong strives to become a financing centre for One Belt and One Road projects.  Hence a bond market of depth and width is indispensable, which will help consolidate Hong Kong's position as an offshore RMB centre and develop the SAR into an RMB asset management hub.

  Thirdly, after RMB's inclusion into basket of currencies that make up the International Monetary Fund's (IMF) the Special Drawing Right (SDR), demand for RMB assets are on the rise.  The three international rating agencies sooner or later will include the Mainland bond market into their global bonds indices.  It is estimated that at the initial stage hundreds of billions of US dollars will be input into the Mainland bond market.  It could be said that the Mainland-Hong Kong bond market link is born in a right time.

  The greenlight for the bond market link highlights the important role Hong Kong plays as an experiment field for the RMB to go global.  It is also a very important step to upgrade RMB's status in foreign exchange trading and as a currency of payment.  This is of significance for improving global financial administration and promoting reformation of the international monetary system.

  16 March 2017

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