The bond "Southbound Trading Link" will celebrate its third anniversary on September 24th.

Since its launch, the "Southbound Trading Link" has provided domestic investors with a convenient channel to invest in foreign bond assets, further broadening the options for domestic investors to diversify their overseas asset allocation.

This year, the "Southbound Trading Link" has maintained a relatively fast growth trend.

As of the end of July, the Shanghai Clearing House (referred to as "SHCH") has custody of 902 "Southbound Trading Link" bonds through the financial infrastructure interconnectivity model, with a balance as high as 466.25 billion yuan, a year-on-year increase of 11%.

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The "Southbound Trading Link" and the Dim Sum bond market have achieved mutual success this year.

The booming Dim Sum bond market has driven the rapid growth of the bond "Southbound Trading Link" scale.

According to the statistics of Guojin Securities' research report, as of September 9th, a total of 904 Dim Sum bonds have been issued this year, with a total scale of 554.5 billion yuan.

Compared with the issuance scale of the entire year of 2023 (604.5 billion yuan), the issuance scale of Dim Sum bonds this year is expected to set a new high.

The mainstream investment channels for Dim Sum bonds include "Southbound Trading Link", QDII, RQDII, etc.

The unprecedented heat of the current Dim Sum bond issuance may benefit from the cost advantage of offshore RMB, and the supply and demand of Dim Sum bonds are booming at the same time, driving the heat of the "Southbound Trading Link" to rise.

As of the end of July, the balance of the SHCH "Southbound Trading Link" custody this year has increased by more than 10 billion yuan compared to the end of last year.

Compared with the previous year, the increase in the "Southbound Trading Link" custody balance for the entire year last year was less than 7 billion yuan.

"Although the current scale of the 'Southbound Trading Link' is relatively small compared to the hot 'Northbound Trading Link', the overall demand is still strong."

Huang Jiachen, Managing Director of Invesco and Head of Fixed Income in the Asia-Pacific region, said that the "Southbound Trading Link" not only provides domestic investors with more diversified investment channels, but also provides support for the further development of the Hong Kong offshore RMB bond market.

In the past two years, more and more domestic and foreign companies have chosen to issue Dim Sum bonds in Hong Kong.

The scale of the Dim Sum bond market has expanded significantly in the past two years, which has further enhanced the international recognition of RMB financing.

Wang Dahai, President of Bloomberg Greater China, also said that since the operation of the "Southbound Trading Link" for three years, domestic funds have continued to inject vitality into the Hong Kong bond market, especially enhancing the liquidity of "Dim Sum bonds", and also promoting the investment of green bonds in the offshore market.

Huatai Securities' research report believes that influenced by factors such as high financing costs of US dollar bonds, restrictions on domestic financing of urban investment, and institutions seeking to increase income, the supply and demand of the Dim Sum bond market have been booming this year.

The existing Dim Sum bonds are mainly government, financial, and urban investment bonds, with the remaining term concentrated in 1-3 years, and the average maturity yield is between 3%-5%.

Bonds with a yield above 6% are mostly urban investment bonds, and there is a high yield mining space.

Suggestions for further optimizing the "Southbound Trading Link" mechanism.

While expanding the channels for domestic investors to allocate overseas assets, the "Southbound Trading Link" is also conducive to improving the ability of domestic investment institutions to diversify asset allocation and risk management capabilities.

"The implementation of the 'Southbound Trading Link' has had a significant training effect on domestic institutions."

Huang Jiachen said that these institutions have improved their international operation capabilities by participating in this market, adapting to different market environments and regulatory systems.

At the same time, investment decision-making and risk management capabilities have also been improved, making wiser decisions and taking effective risk management measures in the face of more investment options and risk challenges.

In addition, domestic institutions focus on product innovation and business expansion in the "Southbound Trading Link" market, actively launching innovative products that meet market demand, and cooperating with international partners to expand related businesses.

Risk hedging is crucial for the stable development of investors and the market.

Huang Jiachen believes that the "Southbound Trading Link" market needs more risk mitigation tools to provide a broader range of options.

For example, "Southbound Swap Link", and regulatory and risk management measures continue to keep pace with the times to avoid potential risks.

Strengthening international cooperation is also very important to jointly promote the development of risk mitigation tools and the formulation of regulatory standards to meet the challenges of cross-border risks.

By comprehensively considering market demand and risk management, regulatory authorities can promote the development of risk mitigation tools in the "Southbound Trading Link" market to ensure market stability and investor interests.

"When investing across borders through the 'Southbound Trading Link', domestic investment institutions have a relatively large demand for risk hedging strategies, and we suggest including supporting risk hedging strategies in the scope of cross-border transactions of bond futures and repurchase agreements."

Huang Jiachen said.

In addition to enriching risk hedging methods, to further optimize the "Southbound Trading Link" mechanism, Huang Jiachen suggested that in the future, the investment process can be further simplified and transaction costs can be reduced.

He said that although the "Southbound Trading Link" mechanism has achieved interconnection between domestic investors and overseas markets, there are still some cumbersome links and high transaction costs in the investment process and fund settlement.

By simplifying the process, improving efficiency, and reducing costs, more investors can be attracted to participate and increase market liquidity.

In addition, in the future, it is also possible to further increase the number of market-making institutions and expand the scope of investable assets.

Huang Jiachen said that there are currently 22 market-making institutions in the "Southbound Trading Link", which is very beneficial to the smooth and orderly operation of the "Southbound Trading Link".

It is suggested that the Hong Kong Monetary Authority continue to consider expanding and optimizing the list of market makers in a timely manner.

At the same time, it is also suggested to reasonably expand the scope of eligible assets and clarify its scope (such as structured notes related to credit, commodities, or stocks), and increase the number of qualified investors.