China Bond Connect has potential to shift PBOC policy - BBG

Bloomberg carries an article on Wednesday on China’s Bond Connect scheme, citing that the new scheme, launched on July 3, could help the PBOC to set the stage for a policy shift.

Key Quotes:

“The China Bond Connect program with Hong Kong that gives offshore investors another way to access the mainland’s $10 trillion debt market.” 

“It will be key to see how Chinese government bond yields respond to inflation and growth data going forward given the impact of foreign investor inflows.”

“To understand why, it’s important to know that the securities trade with a very negative term premium, suggesting that investors are not demanding any extra compensation to own longer maturity bonds rather than just holding and rolling over a series of shorter-dated obligations as they come due.”

“The negative term premium in China is almost entirely explained by the correlation with the short term repo rate. This may start to change when money flowing in from foreign investors normalizes the shape of the yield curve, as well as influence expectations for inflation and interest rates. That may entice the PBOC to base policy more strongly on economic fundamentals.”