1. Report Industry Investment Rating No industry investment rating is provided in the report. 2. Core Viewpoints of the Report - The expansion of Southbound Connect and the improvement of its operating mechanism will provide new channels for domestic institutional investors to allocate overseas bonds. The expansion of participants and the improvement of the mechanism will bring new opportunities for domestic institutional investors to invest in overseas bonds. - The expansion of domestic institutional investors in Southbound Connect is expected to alleviate the unmet demand of non - bank institutions for overseas bond allocation. Non - bank institutions will have more channels to invest in overseas bonds, and the overseas bond market may see more capital inflows into high - coupon bonds such as Chinese - funded US dollar bonds and Dim Sum bonds, which may lead to a further decline in bond yields [91][92]. 3. Summary by Directory 3.1 Recent Development of Bond "Southbound Connect" - **Background and Purpose**: Southbound Connect aims to facilitate domestic institutional investors to allocate offshore bonds by strengthening the cooperation between bond market infrastructure institutions in the Mainland and Hong Kong [11]. - **Regulatory Policy Development**: It has gone through three stages: policy preparation (2017 - 2020), policy launch (2021 - 2022), and deep - opening (2023 - present). In 2025, it is proposed to expand the scope of domestic investors to non - bank institutions and improve relevant mechanisms [13][16][17]. 3.2 Operating Mechanism and Participation Methods of Southbound Connect - **Business Operation and Regulatory Mechanism**: The scope of domestic investors is currently limited to 41 banks and QDII/RQDII - qualified institutions. Investors need to open accounts through designated domestic custodian banks or bond registration and settlement institutions and open accounts in the CMU system of the Hong Kong Monetary Authority for cross - border custody. The total annual quota for all participating institutions is 500 billion yuan, and the daily quota is 20 billion yuan [24][33]. - **Current Domestic Investors Participating in Southbound Connect**: As of July 2025, the expansion policy has not been fully implemented. The investors are still limited to primary dealers (excluding non - bank institutions and rural commercial banks) and QDII/RQDII - qualified institutional investors [32]. - **Participation Process**: It includes qualification approval and account opening, and the bidding process (viewing quotation intentions, sending quotation requests, receiving responses from quotation providers, and confirming transactions). Currently, investors mainly prefer investment - grade Chinese - funded US dollar bonds and high - rated Dim Sum bonds, and the expansion of investors may change the investment preference [38][40]. 3.3 Current Investment Opportunities in Southbound Connect - **Overall Situation of Southbound Connect Sector**: The investable bonds include offshore RMB bonds (Dim Sum bonds), Hong Kong dollar bonds, and G3 currency bonds. As of July 29, 2025, the total scale of tradable bonds in the Hong Kong market was 1.2052 trillion US dollars, with 5,892 bonds. Chinese - funded US dollar bonds and Dim Sum bonds accounted for more than 70% of the investable bonds in Southbound Connect [54]. - **Focus on Dim Sum Bonds**: The scale of Dim Sum bonds has expanded significantly since 2023. As of July 17, 2025, there were 3,099 outstanding Dim Sum bonds with a total scale of 1.5449 trillion yuan. The financial services and sovereign debt sectors have a large scale. Dim Sum bonds have a higher coupon rate than domestic bonds, especially in the urban investment, real estate, and bank sectors. However, attention should be paid to their subsequent performance as the yields have declined significantly in recent months [63][64][67]. - **Focus on Chinese - funded US dollar bonds**: As of early July 2025, there were 2,009 outstanding Chinese - funded US dollar bonds with a total scale of 666.7 billion US dollars. The real estate, internet media, bank, and urban investment sectors have a large scale. The issuance of Chinese - funded US dollar bonds has slowed down since 2023, and the newly issued bonds are mainly unrated. Chinese - funded US dollar bonds have a higher coupon rate than domestic bonds, especially in the urban investment and real estate sectors. Attention should be paid to high - quality individual bonds and short - term risks [71][74][83]. 3.4 Impact of the Expansion of Domestic Institutional Investors in Southbound Connect - **For Non - bank Institutions**: The expansion of participants is expected to alleviate the unmet demand of non - bank institutions for overseas bond allocation. They can invest in overseas bonds through the Southbound Connect channel in addition to using QDII quotas [91]. - **For the Overseas Bond Market**: Non - bank institutions have a relatively more active risk preference. High - risk - return bonds such as the real estate and urban investment sectors of Chinese - funded US dollar bonds and the urban investment sector of Dim Sum bonds may receive more attention and capital inflows, which may lead to a further decline in bond yields [92].