GlobalRMB awards: Person of the year, most impressive innovation
In the final article on our GlobalRMB awards, we talk about the key innovation of the year and highlight the individual that has made the greatest contribution to the development of China’s cross-border capital markets.
Most impressive innovation: Bond Connect
This award aimed to answer the question of which market access or product launch has made the biggest impact on the global appeal of RMB-denominated assets. It should come as little surprise that Bond Connect stood out from the crowd.
GlobalRMB has tracked the progress of renminbi internationalisation and the opening of China’s capital markets since 2013. Bond Connect is not just the most critical innovation we saw during our awards period, it may be the most important since we launched — and perhaps even since China first opened up its capital markets with the qualified foreign institutional investor scheme (QFII) in 2003.
Unlike QFII and most investment schemes that have followed in the past decade and a half, Bond Connect, formally launched in July 2018, finally delivered a gateway into China that got rid of the hurdles weighing down the other attempts, namely quotas and the need for licences.
After relentless lobbying by global industry participants and the Hong Kong Exchanges and Clearing (HKEX), Chinese authorities understood that Bond Connect needed to be different. They stepped out of their comfort zone. The scrapping of licences and quotas risked subjecting the Chinese markets to the volatile flows of global fund managers, including hedge funds, so it was not a risk they were keen to take lightly. But take it they did — and that was undoubtedly the right choice.
Bond Connect single-handedly delivered two landmark achievements. The scheme has virtually guaranteed that Chinese bonds would be included in all major global bond indices, guaranteeing massive inflows from passive investors. But it also managed to trigger active flows from the very beginning.
That was perhaps inevitable. Despite several teething problems — including a rushed launch for the scheme itself, the initial lack of delivery-versus-payment (DVP), questions over tax treatment and limited hedging options — global investors were finally given unfettered access to China’s bond market.
The numbers tell the story: foreign holdings of Chinese bonds have surged, nearly doubling between June 2017 and a year later from Rmb890bn to Rmb1.6tr.
There are still hurdles. There is only a single electronic trading platform approved for Bond Connect, a puzzling shortcoming for what is now a globally successful initiative with over 400 registered investors. This leads many to wonder why Chinese authorities are holding back on approving other, more popular trading platforms — with some wondering if Bloomberg is being kept out more for its news reporting than any concerns over the platform.
And while some of the early kinks, for example on taxes and DVP, have been straightened out, more relaxations are needed to allow foreign investors to access a broader range of onshore derivatives instruments across credit and FX markets.
Still, the change in a little more than a year has been dramatic. Bond Connect was an ambitious scheme from a country that is increasingly opening up to the world. It deserves all the praise it gets.
Person of the year: Charles Li, HKEX
How did GlobalRMB pick between all of the people who made a contribution to the internationalisation of the renminbi, and the development of China’s capital markets, during our awards period? It was no easy task.
The story of China’s opening up has been a group effort and from central bankers and regulators to bankers and fund managers, many people have played a role. One obvious choice for this category would have been to pick one of the regulators that have signed off on one of the many Chinese reforms and liberalisations of recent years. But as Bond Connect's success makes clear, it is crucial for these regulators to keep their ears open and listen to the often wise words that market participants can offer.
Charles Li, chief executive of the Hong Kong Exchanges and Clearing, is one of those who offers wise counsel to China. His colourful style has earned him both admirers and detractors but few could deny that, as the first Mainland citizen in charge of Hong Kong's listing venue, Li has embarked on a deeply transformational process not only for the institution he leads but for the broader markets that the HKEX is embedded in.
Li has managed, with years of hard work, to become trusted by those who count in Beijing. He has also faced enough tough questions from reporters and analysts to make most executives wish for a
Those bridges are now open and, with index providers moving ahead with the inclusion of stocks and bonds in their products, Chinese assets are now well and truly part of the shopping list for investors across the globe.
With another three year contract ahead of him at the helm of the HKEX, Li is undoubtedly spending plenty of time on the Mainland, where he claimed he first conceived of the "Connect" plan. He will now be cooking up bigger and better plans to help China to become truly integrated with the global financial markets. GlobalRMB can only hope the onshore authorities will give him free rein to do so.