FX Viewpoint | RMB: The two new Connect schemes | Article – HSBC VisionGo

RMB: The two new Connect schemes
Finance  ·    ·  6 mins read

  • The GBA Wealth Management Connect and Southbound Bond Connect are going to be launched soon
  • The two new Connect schemes should have limited immediate directional impact on USD-RMB…
  • …but the RMB’s role as an investment currency and its cross-border usage will accelerate from here, in our view

The long-awaited Greater Bay Area (GBA) Wealth Management Connect and the Southbound Bond Connect are going to be launched soon. 

The GBA Wealth Management Connect expands the channels for cross-border retail investment

The GBA Wealth Management Connect is a retail-focused cross-border investment scheme, where eligible residents in mainland cities within the GBA and Hong Kong can invest in wealth management products distributed by banks in each other’s markets. It is designed as a closed-loop system with an individual quota of RMB1m and a total cap of RMB150bn each for both ways. With only 5% of China’s population, the GBA, one of the most developed, innovative, and dynamic economic zones in China, accounts for 12% of China’s total GDP (USD1.6trn in 2019). It is, therefore, natural for the GBA to be chosen as the region to experiment with cross-border investment, so as to leverage developed retail investment businesses in Hong Kong, as well as wealth management businesses in mainland China. 

The Southbound Bond Connect will allow eligible mainland institutional investors to invest in Hong Kong’s bond market

The Southbound Bond Connect will be launched on 24 September, in a further push to liberalise capital flows. This scheme will complement the well-run Northbound Bond Connect (which was launched in July 2017) by allowing mainland institutional investors access to the international bond market via Hong Kong. The initial daily and annual quota are set at RMB20bn and RMB500bn, respectively. 

We expect the two new Connect schemes to have limited immediate directional impact on USD-RMB

In our view, the launch of these two new channels is likely to have limited immediate directional impact on the USD-RMB exchange rate, given the initial quotas are not very large compared to existing investment channels – there are no aggregate quota for Stock Connect, Northbound Bond Connect, China Interbank Bond Market (CIBM), and Qualified Foreign Institutional Investors (QFII)/Renminbi Qualified Foreign Institutional Investor (RQFII) schemes for example. But as we have seen previously, these Connect schemes, for example, Stock Connect (diagram below), can be expanded rather swiftly after the trial stage, and serve as important infrastructure to expand cross-border flows over time. 

The RMB’s role as an investment currency and its cross-border usage will accelerate from here, in our view

RMB-denominated trade and investments settlement and clearance activities have significantly boosted cross-border usage of the RMB – the RMB now accounts for about 40% of China’s cross-border FX payment volume (State Administrate of Foreign Exchange, 20 August 2021). The RMB’s role as an investment currency will only accelerate from here, in our view. The linkages between onshore and offshore exchange rates and interest rates may also become tighter over time, as cross-border flows increase.

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