China’s ‘Southbound Bond Connect’ makes buying foreign bonds easier

September 28, 2021: -A new channel for mainland investors to purchase overseas bonds opened, even as uncertainty lingered regarding the fate of heavily indebted developer China Evergrande Group. The Southbound Bond Connect is an arrangement allowing institutional investors in mainland China to invest in the Hong Kong bond market “through the connection amid the Mainland and Hong Kong financial infrastructure services institutions,” according to the joint announcement by the People’s Bank of China and the Hong Kong Monetary Authority on September 15.

HKMA Deputy Chief Executive Edmond Lau says the opening is a “breakthrough,” which completes the two-way space of China’s bond market through Hong Kong.

“I think the biggest benefit would be that it helps to enlarge the investor base of our Hong Kong bond market,” Lau told CNBC.

“Mainland investors, they have very high savings rate, and they have a need to diversify their risk and asset portfolio, and hence this is a good direct and convenient channel for them to invest into the offshore bond market through Hong Kong,” he added.

The Southbound Bond Connect is one of multiple “connect” programs linking mainland markets with Hong Kong. Other programs include the Stock Connect, allowing investors in the mainland to trade stocks in Hong Kong while allowing foreign investors to access Shanghai and Shenzhen listed shares in the continent.

The new bond investment channel’s launching for mainland investors comes as questions remain over debt-ridden Evergrande’s ability to pay off a massive interest on a dollar-denominated bond that was due Thursday.

While a unit of the company committed to paying the interest on a mainland-traded bond, Evergrande has thus far been silent on the 83 million dollar bond interest payment, with more coupon payments due in the coming weeks.

On Thursday, even though no payment was made, the company will not technically default unless it does not become successful in making that payment within 30 days.

“We cannot comment on the affairs of individual companies, but what we can say is that the Hong Kong banking sector’s exposure to the high-leverage real estate developers on the mainland is not significant,” Lau said.

“We believe that any impact rising from a fallout of these companies are manageable in Hong Kong,” he added.