Impact of mainland-HK bond connect likely to be small

Regulators this week approved a scheme that will allow investors with brokerage accounts in Hong Kong to invest directly in mainland bond markets, set to be launched before the end of this year. But while the announcement has drawn attention to China’s bond markets, we doubt it will make a big difference to demand for Chinese bonds, at least in the near term. After all, the country’s interbank bond markets have been open to foreign financial institutions since early 2016. Although the value of bonds held by foreigners has risen since then, the share of Chinese bonds that are foreign-owned remains trivial. The latest COFER data from the IMF also reveal that renminbi bonds accounted for just 1.1% of global FX reserves for which the currency breakdown is known, underlining the point that the global appeal of China’s capital markets is weak.