Hong Kong Stock Exchange Plans To "Fight Again" Treasury Bond Futures

Zhu Lina reports from Hong Kong

Three years later, the Hong Kong stock exchange again planned to launch treasury bond futures contracts.

On September 22, Li Xiaojia, the chief executive of the Hong Kong stock exchange, revealed at the "RMB fixed interest and currency forum 2020" (hereinafter referred to as the forum), that derivatives are particularly important for fixed income and money markets. After completing a series of derivatives related to the Asian regional market, the HKEx plans to introduce treasury bond futures contracts again, and will ensure that Hong Kong is the first offshore market for China's treasury bond futures products 。

Previously, the Hong Kong Stock Exchange (HKEx) introduced the pilot scheme of 5-year treasury bond futures contracts in 2017, which was the first futures product with Chinese government bonds as the target in the offshore market in the form of pilot, but this plan was suspended at the end of 2017.

From a global perspective, treasury bond futures are the representative of the exchange rate derivatives, and also the largest trading volume of all interest rate derivatives. Treasury bond futures have the characteristics of low cost and good liquidity, which are easy to manage interest rate risk. The introduction of treasury bond futures contracts by the Hong Kong stock exchange helps to fill the market gap of interest rate risk hedging tools for overseas investors.

However, it is understood that the trading volume of treasury bond futures at that time was not large, and the two contracts "htf1706" and "htf1709" launched at that time totaled less than 300 contracts on the first day of listing. After that, the average daily turnover of 1709 was less than 100, and the average daily position was only about 350.

Li Xiaojia said frankly that the US Federal Reserve injected a large amount of liquidity into the market with unprecedented strength, which led to the flooding of US dollars and continued to push up global asset prices. Although the U.S. dollar still dominates the global market, the market is increasingly suspicious of relying solely on the dollar system in the future. As the world's second largest economy, China should seize the opportunity to accelerate the process of RMB internationalization.

He pointed out that fixed income and currency are the basis of modern financial market, and also define the major international financial centers in the world. Hong Kong is not the largest US dollar center. All along, fixed income business has been dominated by markets such as the United States and London. The onshore fixed income market in mainland China is already large, but it is mainly an internal closed market with RMB as the center. "As the only offshore center of the RMB and the link to the US dollar, we are confident that Hong Kong will become the next global fixed income center."

From a global perspective, treasury bond futures are the representative of the exchange rate derivatives, and also the largest trading volume of all interest rate derivatives. -Photo by Gan Jun

The transaction amount of bond link increased by 10 times

Since the launch of bond link in July 2017, international investors can access and invest in all types of bonds in the mainland interbank bond market without changing the original transaction settlement system and habits. This is an important milestone in the opening up of China's bond market.

During this period, the Hong Kong Stock Exchange (HKEx) has continuously upgraded its infrastructure, including the opening of the e-finding system and the opening of block trading. Li Xiaojia disclosed that the average daily turnover of the bond link has reached 20 billion yuan this year, almost 10 times of the initial trading volume. At the same time, the HKEx will establish post trade facilities.

According to the data, by the end of June 2020, there were more than 550 overseas institutions entering the market through bonds, and the number of registered accounts had reached 2012, with a year-on-year increase of 70%; in the past three years, the cumulative turnover exceeded 6 trillion yuan, with the highest daily turnover of 36.9 billion yuan.

For a long time, the outside world is very concerned about when to start the "southbound" trading of bond link. Market participants said that the bond link first adopted North Trading, mainly considering the higher technical requirements of southbound. At present, the international bond market is still dominated by traditional over-the-counter transactions, and there are some difficulties in the docking of Nantong transactions.

According to Hong Kong media reports, according to the information from the Hong Kong Intellectual Property Department, the Hong Kong Stock Exchange's bond link company applied for registration of the "eprime" trademark, similar to the bond market information disclosure platform of the current stock "disclosure" platform of the Hong Kong stock exchange, which may pave the way for the south direction of bond link.

At present, due to the low interest rate of bonds and other products, Li Tan Tong has entered the era of low interest rate and even low bond yield. Bond link is active due to arbitrage opportunities in the mainland and the global market. However, it is expected that the spread will continue to narrow. Therefore, Hong Kong must follow the pace of other markets to develop derivatives, settlement and even post transaction services.

International investors favor Chinese dollar bonds

As the world enters the era of negative interest rates, the market liquidity is abundant, and overseas funds accelerate to return to emerging markets.

Lu Jian, executive director of ICBC Asia, said at the forum that in the "post epidemic" era, the allocation value of Chinese dollar bonds has been highlighted. "From the perspective of capital supply, central banks of various countries implement loose monetary and fiscal policies and inject a large amount of liquidity into the market, which is good for fixed income investment. In terms of investment value, compared with RMB bonds issued in China, the yield of US dollar bonds issued overseas by similar Chinese issuers is higher. There is still a significant interest rate gap between China and the United States. The interest spread of investment grade bonds is about 80 basis points, while that of non investment grade bonds even reaches 200-300 basis points, which is very attractive to international investors. "

In addition, he said frankly that the market is very concerned about the default of Chinese issuers. "The default rate in the past five years was about 1%, while that in the European and American markets was 2% - 3%. Moreover, the default of individual domestic Chinese issuers breaks the rigid cashing of the market, which helps to make pricing more market-oriented. "

In fact, due to the impact of the new crown epidemic, the pace of overseas bond issuance of Chinese enterprises has been stagnant. At the forum, Hu Chenwen, general manager of rating business department of China integrity (Asia Pacific) credit rating Co., Ltd., said: "the epidemic has brought great volatility to the overseas bond market. The overseas bond issuance activities of Chinese funded enterprises stopped in March and April this year, and the bond price in the secondary market fell sharply, but it has gradually recovered to the level before the epidemic."

She pointed out that in January this year, Chinese real estate enterprises issued bonds in the overseas market very actively, with a total amount of about US $16.5 billion, which was mainly used for the refinancing of overseas debts. However, during March and April, the issuance volume was almost zero, and then rebounded rapidly, showing a V-shaped situation. In the first eight months of this year, the total amount of overseas bonds issued by Chinese real estate enterprises was about 44 billion US dollars, accounting for the overall overseas issuance About a third of the debt.

According to the data released by the national development and Reform Commission, in the first half of this year, 164 Chinese enterprises issued 264 medium and long-term bonds overseas, totaling US $103.31 billion, and the scale rose significantly from June to July.

Despite the spread of the epidemic and geopolitical tensions, international investors are still enthusiastic about Chinese dollar bonds. Owen gallimore, head of credit strategy of ANZ bank, also said at the forum that the Chinese dollar bond market showed great "resilience". Since September, the issuance amount has been about $20 billion, and the total bond issuance so far this year is about $150 billion, basically the same as last year. "

"In addition to Chinese and Asian investors, there is a strong demand from international investors for investment grade US dollar bonds. Take the recent US dollar bonds issued by Tencent music and entertainment group as an example, 40% of the subscription is from American investors, and 25% from European investors.