China further opens up bond market

China has taken another significant step toward liberalising its financial system after the country announced a move to further open up its bond market. 

The People’s Bank of China and Hong Kong Monetary Authority have approved a ‘Bond Connect’ initiative which will allow offshore investors participate in the China Interbank Bond Market (CIBM), likely starting in July. 

" The move may seem technical in nature but in practice is another crucial step to further financial market liberalisation.”

The move may seem technical in nature but in practice is another crucial step to further financial market liberalisation in the Asian giant. 

‘Bond Connect’ represents an additional avenue for offshore investors to participate in onshore bond market and is likely to incur more capital flows. The innovative arrangement will see a bourse participate in an interbank market on behalf of a group of offshore retail investors.

Since sizeable financial institutions have already been invited to participate in CIBM directly, this arrangement will widen the investor base for the onshore interbank market.

In addition, offshore retail investors can save on paperwork for licence applications and direct regulatory surveillance onshore.


Traders will be allowed access to the market via Northbound trading, without a quota. Southbound flows will be allowed some time in the future.

ANZ Research understands there will be a panel of about 10 market makers at CFETS to support bond pricing and flows. Offshore investors will buy bonds via their offshore brokers who are members of HKEX.

Anecdotally, bond transactions will be settled between China Central Depository and Clearing, Shanghai Clearing House and Hong Kong Securities Clearing Company Limited. The latter will act as a ‘normal bond holder’ on behalf of offshore investors.

Market participants have not yet received any guidance on FX settlements.

Authorities appear to want to induce capital inflows by launching Northbound Trading only at this stage. However, such inflows will likely be small initially, indicated by a dismal volume of bond futures currently traded at HKEX. Daily average volume has been only 154 futures contracts since April 10. Bond Connect may help improve the liquidity of CGB futures (five-year CGB) launched by HKEX in early April.


The bond futures should be a more transparent and a proper instrument for hedging the onshore bond position, compared with OTC traded non-deliverable interest rate swaps, as the latter are linked to the seven-day repo fixing rate. In addition, trading activities of CNH IRS are scant in the offshore market.

In terms of FX conversion, our understanding is that Bond Connect may allow onshore conversion. This is different from Stock Connect, which involves a panel of RMB liquidity providers in Hong Kong and the conversions of foreign currencies to CNY in the CNH market. 

If this is the case, the inflows will translate into CNY buying. This arrangement will exert less liquidity pressure in the CNH market.

Raymond Yeung is Chief Economist Greater China, Betty Rui Wang is Senior China Economist & David Qu is China Markets Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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