Plans abound to connect China’s bond market with offshore counterparts but they have had little success until recently. Now Russia’s National Settlement Depository (NSD) is close to launching a link in the first half of 2017, Eddie Astanin, chairman of the executive board, told GlobalRMB.
The genesis of the China bond link comes from a memorandum of understanding (MoU) signed last month between the China Central Depository and Clearing (CCDC), the central securities depository for the China interbank bond market.
“The general idea was to set up a linkage between the CSDs [central securities depositaries],” said Astanin. “The linkage means we can provide easier, faster and cheaper access for Chinese and Russian investors and companies to both markets.”
NSD, part of the Moscow Exchange (Moex) group, provides safekeeping across different asset classes, including corporate bonds and other securities, and has some Rb33tr ($500bn) of assets in custody.
Astanin noted that NSD had gone through a similar process in the past when setting up connectivity with Western CSDs such as Clearstream, which opened up the Russian corporate bond market to foreign investors in 2014.
The Hong Kong Exchange (HKEX) has also been looking at a bond market linkage with China for some time. That plan, which revolved around the idea of starting with a bridge between the Hong Kong and mainland exchange-traded bond markets, has yet to come to fruition however.
China’s access reforms to the interbank bond market this year, have been viewed as a strong signal that global investors were more likely to seek direct access to the Chinese market rather than through intermediaries.
However, European CSDs such as Clearstream have also put into place bond market linkages this year. Clearstream launched its own programme, called China Bond Link, on October 18, the firm said in a statement.
And now NSD is in the process of finalising its own link with China’s market.
“We believe in the huge investment potential of this market,” Astanin said. “Russian companies are interested in attracting Chinese capital for their commercial purposes and we know that Chinese investors are now operating in the Russian financial market via Western intermediaries. Our idea is to make this more straightforward and faster by establishing the link directly between us.”
Foreign holdings of Chinese bonds are expected to grow rapidly, reaching Rmb763bn ($114bn) in June, according to CEIC data. Frances Cheung, rates strategist at Société Générale, wrote in an October 19 report that she expected foreign ownership to reach some Rmb2tr by end-2017 as a result of recent liberalisations.
Flood of RMB issuance
An important push for the Russian initiative are plans for cross-border bonds by Russian issuers.
“We know that some 30 Russian companies are going to issue RMB bonds in the China market. So NSD can act as the CSD to provide access to that market. We are also aware that the Russian Ministry of Finance has announced plans to issue Russian government bonds denominated in RMB, this initiative is designed to give Russian companies indicative yields for the issuers of RMB-denominated corporate bonds in the future.”
The link will essentially enable investors in each market to use their existing accounts with the local CSD to access the other market without having to set up additional accounts.
Astanin noted that while international investors were already quite familiar with the process of setting up accounts in the Russian market, China still remained complex.
“China is just at the beginning of opening up to international community. The Chinese legislation’s requirements for disclosure, for example, are designed for local purposes and in some areas they don’t match with international requirements and standards. So we understand that it may take some time to harmonise the legislation to international requirements.”
Some specific issues arising from the differences in regulation, however, were unlikely to disappear quickly.
“It will take some time to eliminate this gap. For example, the Chinese legislation does not allow the nominee structure, and this is an obstacle for international investors that want to reach market directly, so they operate via local custodians. But it can be more expensive that way.”
The scheme is now awaiting approval from the People’s Bank of China, with the Central Bank of Russia ready to move forward, according to NSD.
And the link is not restricting itself to bonds with the next asset class likely to be equities.
“We will start with the government bond and, if that’s successful, the next step is equities. One year ago we met the management of the Shanghai exchange and talked about the potential link between markets in equities and saw positive reaction from Chinese side.”
As for the bond connect plan, the scheme is expected to go live in a matter of months.
“It is probable that we will launch the link in the first half of 2017,” he said.