China: full speed towards market liberalisation

There's a saying: "you wait ages for a bus, then three come along at once." China is certainly doing its best to prove this old adage right given the amount of news circulated in such a short space of time! Those of you who are particularly keen on the continued liberalisation of the Chinese market would have noticed firstly on 20 June that we had the news that MSCI would include China A-shares in the MSCI Emerging Markets Index. Then on 3 July came the long-awaited announcement that the Bond Connect scheme that would enable foreign investors to buy and sell Chinese bonds had been launched. Finally, an update that sneaked in between these two announcements on 30 June was the news that China would offer settlement cycle choices ahead of the launch of Bond Connect. So what does all this mean for China and for investors? In a previous blog I had stated that Chinese market liberalisation was a gradual process, then all of a sudden it all seems to be happening at once! Don't get me wrong, there is certainly a lot of excitement as Chinese markets continue to open up, but we must not get too carried away, after-all it's still fairly young compared to its counterparts.

Let's first talk about A-shares. Ever since MSCI originally included China A-shares on the 2014 Market Classification Review list back in 2013 the Chinese market has witnessed marked improvements to its accessibility conditions. Conditions had improved to the point that it was a matter of when and not if A-shares would be given the green light for inclusion. After having been rejected for the past three years, this represents a victory not only for international investors but also China who has been working hard to open up its capital markets. The decision has been applauded by the global community and there seems to be a general belief that over the coming five years there is expected to be a dramatic inflow rise of money into the Shanghai and Shenzhen exchanges. At Clearstream, we've been offering Stock Connect service since day one and have continuously upgraded the service in line with the market. 

Which leads me onto Bond Connect, the sister scheme to the already established Stock Connect, which already links Hong Kong, Shanghai and Shenzhen as a fundamental international channel for eligible China A-shares. Now on the fixed income side, Bond Connect is widely expected to attract significant amounts of foreign capital to the mainland Chinese Interbank Bond Market (CIBM). Bond Connect is China's most recent initiative of mutual market access between China and Hong Kong and a further step in the internationalisation of the renminbi as it becomes easier for foreign investors to trade bonds in China. And if the first day of trading is anything to go by, with 89 financial institutions conducting 142 trades worth over USD 1 billion, I can only see this success story continuing. While Clearstream customers can already benefit from direct access to China’s bond market via our China Bond Link, Bond Connect, which we intend on offering a link to later this year, will offer investors with even easier and quota free access channel to the onshore CIBM.

The final piece of the most recent market liberalisation jigsaw that I'd like to mention is about the T+2 settlement cycle. As of 30 June, investors are able to settle their CIBM trades on a T+2 settlement cycle (while still being able to settle T+0 and T+1 if they so wish), which means that China is now more aligned with international settlement cycle practices and should increase liquidity for settling such trades. This extended settlement cycle applies to both the onshore direct scheme, currently available through our China Bond Link, as well as the offshore Bond Connect scheme, which we intend to offer access to customers later this year. This important development will further encourage investors from Europe and beyond to look into investing in Chinese bonds, by giving them extra time to send their settlement and funding instructions to their agents within the market deadlines, especially given that the shorter settlement cycle had always been perceived as a major challenge by foreign investors outside of Asia up until now. 

We shall see how these developments evolve, however, with China’s USD 9 trillion bond market beginning to open up to foreign investors there are certainly exciting times ahead and we at Clearstream will be doing our utmost to support our customers' business into these latest access channels.

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