Economic Watch: Swap Connect to further boost global holdings of Chinese bonds-Xinhua

Economic Watch: Swap Connect to further boost global holdings of Chinese bonds

Source: Xinhua

Editor: huaxia

2022-07-08 20:09:31

HONG KONG, July 8 (Xinhua) -- For French investment professional Jean-Marie Mercadal, the recently announced "Swap Connect" between the Chinese mainland and the Hong Kong Special Administrative Region (HKSAR) gives another reason why Hong Kong remains the best place for global investors to tap the booming onshore bond market.

As CEO of Syncicap, a joint venture established last year between two European asset management firms, Mercadal said that the company chose to be based in Hong Kong for its combined advantages of the international business environment and growing access to the mainland market.

"We are very confident in the Chinese equities market in the long run. With the financial connectivity programs, it is much more easier to buy Chinese equities and bonds on a daily basis," he said.

In addition to the existing stock and bond connect schemes, China announced this week launch of a new "Swap Connect" after six months, allowing mutual access between the Chinese mainland and HKSAR to interest rate swaps trading.

"The Swap Connect will help investors hedge positions through financial derivatives," Mercadal said, adding that the tool will increase the attractiveness of yuan-denominated bonds.

"We are going to buy more and more Chinese bonds because we think renminbi will become more and more international. Chinese bonds and equities are very attractive to our European investors," he said.

Since China launched the Bond Connect scheme five years ago, the onshore yuan bonds market has seen growing interest from international investors.

By May this year, overseas holdings of onshore yuan bonds through the Bond Connect program stood at 3.7 trillion yuan (about 551 billion U.S. dollars), almost four times of that when the scheme was first launched.

With an easier access to the onshore market, investor types have broadened, more investors are included, such as foreign central banks, monetary authorities, sovereign wealth funds, commercial banks, as well as retail funds and pension funds, said Freddy Wong, head of Asia-Pacific for Invesco Fixed Income.

In Wong's view, the onshore yuan bonds provide unique values for global investors compared to other markets. In addition to diversification benefits, the historical default of yuan bonds is also much lower, indicating safer bets.

China's bond market has seen rapid growth in recent years, with opening-up efforts facilitating its scale and complexity. Central bank data showed that by the end of 2021, overseas investors held some 4 trillion yuan of renminbi bonds, accounting for 3.5 percent of the total outstanding bonds under custody.

For global investors, this means much room to tap into the growing and increasingly lucrative market.

"Admittedly, China onshore bond markets remain the most under-allocated market by foreign investors globally," Wong said, adding that the company has a long-term positive view on the internationalization of yuan to promote global capital flow into the Chinese market as good diversification to client portfolios.

China's carbon reduction and environmental push is also making its assets even more attractive to socially responsible investors. Mercadal said that as the company specializes in responsible investment, it would buy more Chinese green bonds in the future.

He is also positive on Hong Kong's role as a financial hub, saying that the company is staying here for the longer term.

"Hong Kong is one of the best financial centers in the world. If you want to access the Chinese market, it's the place to be," he said.