China-Hong Kong Bond Link Adds Upgrade Investors Sought

(Bloomberg) -- A change to the bond trading link between Hong Kong and Shanghai that international investors have been asking for has taken effect, according to a spokeswoman for Hong Kong Exchanges & Clearing Ltd.

Bond connect started using a settlement process known as real-time delivery-versus-payment on Friday, HKEX spokeswoman Lorraine Chan said in an email. The change means investors can pay at the same time they take delivery of securities in a procedure that is seen as more secure.

Allowing delivery-versus-payment should provide a boost to the link, which started in July 2017 and gives offshore investors access to China’s $11 trillion domestic market. It’s been one of several enhancements international firms have said are needed before they would use the system.

The change was also among several necessary criteria for China bonds to be added to the Bloomberg Barclays Global Aggregate Index in April 2019. Bloomberg LP, the parent company of Bloomberg News, owns the Bloomberg Barclays-branded bond indexes.

Fulfillment of this pre-condition means more trading will happen on the bond link, said Albert Shau-Lun Leung, Asia rates strategist at Nomura International (HK) Ltd. The new settlement procedure could bring more offshore fund managers to trade via this platform, and push up volumes, he said.

Close to 400 institutional investors were registered with the bond connect as of July 31, according to its website, and trading turnover last month totaled 115.5 billion yuan ($16.8 billion). International investors held 1.5 trillion yuan of Chinese bonds at the end of June, up from about 840 billion yuan in June 2017, the site shows.

There are more changes to come. Pan Gongsheng, deputy governor of the People’s Bank of China, said in July that users will also be allowed to trade repo and derivatives via the link, without saying when.

--With assistance from Lianting Tu and Miaojung Lin.

To contact Bloomberg News staff for this story: Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net;Ling Zeng in Shanghai at lzeng30@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Katrina Nicholas

©2018 Bloomberg L.P.

With assistance from Editorial Board