Hong Kong eyes retail bond connect scheme with mainland China

Hong Kong authorities unveiled a proposal for a potential bond market connect scheme with the mainland to broaden bond investment options for retail investors, at a time when stock markets on both sides of the border are set to be more closely linked with the newly announced Shenzhen-Hong Kong Stock Connect.

A report titled “Proposal on the Mainland-Hong Kong Bond Market Connect” was released on Tuesday by the Financial Services Development Council (FSDC), an advisory body established by Hong Kong government in 2013 to formulate proposals to promote further development of the city’s financial services industry.

“Following the connection between the mainland and Hong Kong on the stock market, there is room for Hong Kong to further capitalise on the opportunities brought about by the connection in the bond market,” said Laura M Cha, chairman of the FSDC.

Connecting with the mainland’s bond market, which is the third largest in the world with a depository balance of US$8.7 trillion as of the end of July 2016, could broaden investment options for cross-border retail investors and increase liquidity of Hong Kong's bond market which has a market size of US$400 billion, according to the FSDC.

“It could further open the mainland’s capital market,” said George Leung, a member of FSDC’s mainland opportunities committee and an Asia-Pacific advisor for HSBC. “The objective of the scheme is to connect bond markets in the two regions for retail investors.”

The FSDC recommends allowing mutual access for both mainland and Hong Kong retail investors to each other’s exchange-traded bond market under the prototype of the stock connect scheme.

Separately, as most of the trading of bonds in both markets is conducted over-the-counter