26 May 2022
Keynote Speech at ASIFMA China Capital Markets Conference
Edmond Lau, Deputy Chief Executive, Hong Kong Monetary Authority
Onshore Market Development
1. Good morning. I'm delighted to join you virtually at this year's China Capital Markets
Conference. First of all, let me take this opportunity to thank ASIFMA for organising this
event and inviting me to speak.
2. Today's agenda focuses on onshore market developments. I would like to share my
thoughts on the signicance of recent developments in onshore capital markets, as well
as the opportunities for international investors.
3. Mainland capital markets are experiencing a period of signicant growth, with onshore
equity and xed income markets currently the second largest in the world. However,
international investors' exposure to China's capital markets remains relatively small.
Only around 4% of onshore equities and 3% of onshore bonds are owned by foreign
investors, which is low by international standards and far smaller than China's weight in
the global economy.
4. We are pleased to see the Mainland's continued commitment to open up onshore capital
markets in recent years. The latest developments to facilitate foreign investors' access
to the onshore markets and adopt international standards have been encouraging and
welcomed by the industry. Let me highlight a few of them here.
5. First, with the removal of foreign ownership limits, global nancial institutions are able
to further expand their footprint in China by taking majority or full ownership in their
onshore subsidiaries. The domestic credit ratings industry has also gradually opened up
to foreign players to create a level playing eld.
. Secondly, Mainland authorities have continued to enhance foreign investment channels,
such as combining the QFII and RQFII schemes and simplifying the application process.
The inclusion of ETFs in the Stock Connect and linkage between the interbank and
exchange traded bond markets will expand the product range for international investors
participating in the onshore equity and bond markets.
7. Thirdly, China's nancial markets have moved towards closer integration with global
standards. A milestone development is the recent adoption of a legal framework to
bring the onshore futures and derivatives markets under better regulation and in line
with international best practices, such as recognising the enforceability of close-out
netting. Foreign institutions may also choose to sign ISDA agreements with onshore
counterparties in respect of OTC derivatives transactions in the interbank market.
. The liberalisation of the onshore capital markets has resulted in rapid growth in cross-
boundary capital ows in recent years. In particular, Hong Kong's mutual market access
schemes with the Mainland, namely the Stock Connect and the Bond Connect, have
played a crucial role in encouraging greater portfolio investment into China and the
inclusion of RMB assets into major global indices. Within three years, foreign holdings
of onshore equities had more than tripled and foreign holdings of onshore bonds had
more than doubled at the end of last year.
9. Following a strong 2021, foreign equity and bond inows into onshore markets softened
this year on the back of geopolitical uncertainty, Covid lockdowns, and the China-US
monetary policy divergence leading to a reversal of onshore bonds' yield premium.
10. Notwithstanding this, the scale of the decline in foreign purchases and holdings has
moderated recently and is relatively small compared to global investors' total holdings in
onshore equities and bonds. We believe that these short-term uctuations will not
reverse the long-term trend of foreign investment in Mainland capital markets.
11. In fact, several key drivers will continue to strengthen interest in diversication into RMB
assets over the medium term. These include (i) continued inclusion of onshore equities
and bonds into major global indices; (ii) China's long-term economic growth prospects;
(iii) RMB being a stable currency that is increasingly recognised as a reserve currency;
and (iv) lower correlation of RMB assets with other global nancial market assets.
12. These factors are paving the way for a structural shift which will motivate global
investors to think more strategically about their exposure to China. This, in turn, will spur
demand for RMB assets and facilitate the further opening up of the onshore capital
markets.
13. In the remaining time, I would like to highlight in more detail a few upcoming
developments which will be of interest to international investors seeking access to
Mainland capital markets.
14. First is Mainland authorities' efforts to connect the interbank and exchange bond
markets, which will allow participants in each market to access securities in the other
market through an infrastructure connection without having to open separate accounts.
This should ultimately be benecial to the growth of both the CIBM and exchange bond
markets, thus creating a bigger pie.
15. Foreign investors who access the interbank market through Bond Connect or CIBM
Direct will be able to trade in the exchange market, which is the platform where most
non-nancial corporate bonds are lodged. The construction of the system linkage
between the onshore infrastructure institutions is under way. Upon completion, the
HKMA's Central Moneymarkets Unit will explore with the Mainland side on the system
enhancements required for Bond Connect investors to participate in the exchange bond
market.
1. This development moves closer to having a single access point to the onshore bond
market and will further open up access to the fast-growing credit bond market which
remains relatively untapped by international investors. This presents an opportunity for
investors to look further along the credit curve for diversication and yield. Relatedly, the
entry of foreign rms into the onshore credit rating business is expected to facilitate this
process, speed up the convergence of local and global ratings standards, and enhance
foreign investors' analysis of corporate credit.
17. Secondly, Mainland and Hong Kong stock exchanges have reached an agreement to
include eligible ETFs in the Stock Connect scheme and technical preparations are under
way. This will give global investors direct and ecient access to the rapidly developing
onshore ETF market, enrich the product range under Stock Connect and facilitate the
healthy development of the ETF markets on both sides.
1. Thirdly, as Mainland bonds play an increasingly strategic and long-term role in investors'
portfolios, the demand for hedging tools is also growing. Our priority in the next stage of
enhancements to Northbound Trading under Bond Connect is the inclusion of risk
management tools. We are discussing with our Mainland counterparts to facilitate
access to various risk management products such as interest rate swaps to meet global
investors' hedging needs for their bond investment in the Mainland.
19. Over the years, Hong Kong has played a central role in intermediating the nancial ows
between the Mainland and the rest of the world. The development of onshore capital
markets presents huge opportunities for Hong Kong's nancial sector.
20. At the HKMA, we have been continuously working with Mainland authorities and relevant
parties to explore new initiatives and introduce market-oriented enhancements to our
various Connect schemes, with a view to improving foreign investors' access to onshore
markets and smoothening the investment experience.
21. We warmly welcome views and suggestions from the industry on ways to leverage the
unique attributes of Hong Kong to better serve global investors, support the
development of onshore markets and advance the internationalisation of the RMB.
22. Thank you. I wish today's conference a great success.