In July, BNY Mellon hosted a live audio webcast, A Closer Look at Bond Connect. Magdalene Tay and experts from Bloomberg reviewed the scheme, one year post-launch. They shared insights on the impending global bond indices inclusion, the challenges and opportunities for foreign investors.
Since its launch on July 3, 2017, the Bond Connect scheme has drawn interest from offshore investors seeking to participate in the China Interbank Bond Market (CIBM) – the world’s third-largest bond market with value over US$10 trillion1. Today, more than 300 foreign investors have registered and participated in the CIBM through Bond Connect and that number is expected to rise. China’s onshore bond market has been growing at 20% year-on-year2 with foreign holdings increasing among two of the most popular types: China government (72%) and policy bank bonds (26%) (See Figure 1).
For investors, one notable development around the scheme has been the accelerated inclusion of China into major global bond indices. In March this year, it was announced that one of the most widely-used fixed income benchmarks, the Bloomberg Barclays Global Aggregate Index, would gradually phase in Chinese RMB-denominated government and policy bank securities over a 20-month period from April 20193.
Once added, RMB will be the fourth largest currency component (5.7%) of the Index. Currently, USD stands at the largest (41%), EUR at second (24%), followed by JPY (16%) (See Figure 2).
Three other Bloomberg indices that will include China are the Asia Pacific Aggregate, Emerging Markets Local Government and the Emerging Markets Local Government with China Capped4.
Post our webcast, three significant moves were announced to enhance the Bond Connect scheme, which have the potential to encourage participation and more maturity across the debt markets.
- Implementation of delivery: On August 24, China implemented a true delivery-versus-payment (DVP) settlement system for transactions through Bond Connect. Under this settlement, payment for bonds is due at the time of delivery, which effectively reduces settlement risk.
- Block trade allocation: On August 31, Bond Connect launched the service of block trade allocations, which allows foreign investors to allocate block trades across accounts prior to the trades5. With the pre-trade allocations function going live effective September 3, traders can execute a single block trade (in one electronic request) and allocate specific percentages or absolute amounts of the trade to maximum 30 individual accounts. The block trade facility is available on the TradeWeb platform.
- Taxation: The State Council of People’s Republic of China announced that coupon interest income received by foreign institutional investors in China bond market will temporarily be exempted from corporate income tax (CIT) and value added tax (VAT) for three years6.
Similar to the impact of Stock Connects being included into MSCI indices7, the Bond Connect could help to draw meaningful inflows to the onshore market in the long term. As more global investors include Chinese bonds to their portfolios, it will be especially important to watch the transformation this will bring to key bond indices and the overall debt market in China.
1 Source: World Federation of Exchanges, as of January 2018
2 https://www.bnymellon.com/apac/en/_locale-assets/pdf/our-thinking/untying-chinas-gordian-knot.pdf
3 https://www.bloomberg.com/company/announcements/bloomberg-add-china-bloomberg-barclays-global-aggregate-indices/
4 Bloomberg
5 http://www.chinabondconnect.com/documents/News2018-08-30EN-Allocation.pdf
6 https://www.bloomberg.com/news/articles/2018-08-30/china-plans-tax-cuts-for-foreign-bond-investors-to-aid-growth
7 https://www.bnymellon.com/apac/en/_locale-assets/pdf/our-thinking/stock-connect-charting-a-future-course.pdf
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Magdalene Tay
APAC Custody Product Manager, BNY Mellon Asset Servicing
Magdalene Tay is the APAC Custody Product Manager for Asset Servicing based in Singapore. In her current role, Magdalene is responsible for core custody related product development and key market initiatives in the region. Magdalene is a specialist on the China market and is currently developing a China access roadmap for BNY Mellon clients.
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