Investors outside China may soon find it easier to get their hands on the country's bonds.
A newly implemented settlement system for the bond investment scheme connecting the mainland to Hong Kong was announced Monday. It's significant because it opens up the market to more investors by now meeting a widespread regulatory requirement.
It will also pave the way, analysts said, for the country's debt securities to be included in a major global index. Beijing is aiming to have its bonds added to the Bloomberg-Barclays Global Aggregate Index, a key benchmark — much as it did for its China-listed stocks, which were ultimately included in the MSCI emerging markets index in June.
The news means "a major hurdle" was cleared toward securing "smooth inclusion of China bonds into the Bloomberg-Barclays Global Aggregate Index," Andre de Silva, HSBC's head of global emerging markets rates research, and Pin Ru Tan, an Asia-Pacific rates strategist at the bank, said in a note on Monday.
As part of its financial market opening, China has established connections with Hong Kong to enable increased access to its still highly regulated stock and bond trading.
Hong Kong, a semi-autonomous Chinese region since 1997, has long had open and liquid capital markets due to its history as a trade and finance center. China has sought to leverage that for its own financial and economic development through bond and stock "connects," enabling some trading access between mainland Chinese and overseas investors.
'Critical importance'
The change announced Monday was made to a program called Bond Connect, which enables overseas investors from Hong Kong and elsewhere to invest in Chinese bonds through investment links between Hong Kong and the mainland. Monday's announcement was that Bond Connect has fully implemented a new settlement system known as real-time delivery-versus-payment, or RDVP.
The process ensures that payment and delivery happen simultaneously, Hong Kong-based Bond Connect said, calling it a "milestone."
"The full implementation of RDVP for Bond Connect enables international investors under (some) regulatory requirements to join the scheme and seek investment opportunities in China Interbank Bond Market," Bond Connect said in a Monday news release.
The RDVP implementation is also significant in that it aligns Bond Connect with the domestic China Interbank Bond Market, where such settlement is already allowed, they said.
Monday's move may be important, but it isn't enough to ensure Chinese bonds are included in the global bond index, according to HSBC's De Silva and Tan. They said the next steps will be for China to approve a trading measure necessary for portfolio managers to simultaneously deal on behalf of more than one fund and to offer clarity on taxes.
John Woods, chief Asia-Pacific investment officer for Credit Suisse, said that eventual entry into the Bloomberg-Barclays index will initially have only a minimal impact on Chinese domestic bond yields. Still, he said, it would be a significant development.
"More broadly, as perhaps a symbolical first step towards inclusion in the global family of indices, it's of critical importance," Woods told CNBC on Tuesday, noting parallels with the MSCI inclusion.
"We're seeing Chinese risk, both fixed income and equity, becoming more of a tradeable asset, more of an investable risk asset as far as global investors are concerned," he said.