Core Viewpoint - The Guangdong-Hong Kong-Macao Greater Bay Area is positioned as a frontier for China's opening up to the world, with increasing numbers of enterprises from the region moving towards international markets, supported by Hong Kong's advantages as an international and market-oriented platform [1][2] Group 1: Financial Development and Cross-Border Cooperation - The Hong Kong Monetary Authority (HKMA) has made significant progress in cross-border credit cooperation in the Greater Bay Area over the past two years, enabling banks in Shenzhen and Hong Kong to establish credit information for cross-border enterprises, thus providing a more reliable basis for cross-border financing [1] - The HKMA encourages mainland enterprises to establish overseas business headquarters and treasury centers in Hong Kong to effectively manage overseas funds [1] Group 2: Payment Systems and Technological Advancements - Current global payment systems face challenges such as multiple intermediaries and high costs, but these issues are expected to be gradually resolved with technological advancements [1] Group 3: Investment Connectivity and Market Response - The HKMA and mainland regulatory bodies are enhancing the "Southbound Pass" initiative, expanding the range of investors from banks to include major securities firms, funds, insurance, and wealth management institutions, injecting new momentum into the program [2] - As of June this year, over 160,000 individual investors participated in the "Cross-Border Wealth Management Connect," more than double the number during the previous version [2] - The market value of holdings under the Southbound Pass has exceeded 16 billion RMB, doubling compared to the previous version of the program [2]

Core Viewpoint - UBS has raised its average daily trading volume forecasts for Hong Kong Exchanges and Clearing (HKEX) for the years 2025 to 2027, reflecting positive market data and institutional targets for the Hang Seng Index [1] Group 1: Trading Volume and Earnings Forecast - The average daily trading volume forecast for HKEX has been increased to HKD 230 billion, HKD 193 billion, and HKD 219 billion for 2025, 2026, and 2027 respectively [1] - Earnings per share estimates have been raised by 5%, 3%, and 2% to HKD 12.5, HKD 10.9, and HKD 11.8 for the same years [1] - The target price for HKEX has been adjusted from HKD 430 to HKD 464, while maintaining a "Neutral" rating [1] Group 2: Southbound Trading and Market Participation - The contribution of southbound trading to HKEX's overall average daily trading volume is expected to nearly double from approximately 16% in Q1 of last year to nearly 28% in the current third quarter [1] - Increased participation from a broader base of domestic investors, particularly retail investors, indicates further potential for growth in southbound trading [1] Group 3: Future Developments - HKEX is exploring the possibility of zero-day options, although the complexity of execution means that a specific timeline is still unclear [1] - The exchange believes that extending trading hours requires comprehensive consideration from various perspectives [1]

Group 1 - UBS predicts that the contribution of southbound trading to the average daily trading volume of the Hong Kong Stock Exchange (HKEX) is expected to double from approximately 16% in Q1 of last year to nearly 28% in the third quarter of this year [1] - The increase in participation from domestic investors, particularly retail investors, indicates further potential for southbound trading growth [1] - HKEX is exploring the possibility of zero-day options, but the complexity of execution means that a specific timeline remains unclear [1] Group 2 - HKEX is considering the extension of trading hours, which requires comprehensive consideration from various perspectives [1] - Based on market data for Q3 and updated institutional targets for the Hang Seng Index, UBS has raised its average daily trading volume forecasts for HKEX for 2025 to 2027 to HKD 230 billion, HKD 193 billion, and HKD 219 billion respectively [1] - Earnings per share estimates have been increased by 5%, 3%, and 2% for the same years, reaching HKD 12.5, HKD 10.9, and HKD 11.8 respectively [1] Group 3 - UBS has raised its target price for HKEX from HKD 430 to HKD 464 while maintaining a "neutral" rating [1]

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].

Group 1: Report Industry Investment Rating - No information provided in the given content Group 2: Core Viewpoints of the Report - Bond Southbound Connect is about to expand, which may increase the demand for Chinese overseas bonds. The report focuses on the overview of Bond Southbound Connect, the historical performance of Chinese overseas bonds, and the future opportunities of Chinese overseas bonds [10][13] Group 3: Summary According to the Table of Contents 1. Bond Southbound Connect Overview - **Southbound Connect Expansion Policy Support**: Multiple meetings and activities in 2025 have mentioned the expansion of Southbound Connect, including extending settlement time, supporting multi - currency bond settlement, expanding the scope of eligible domestic investors to non - bank institutions such as brokers, funds, insurance, and wealth management [10][11] - **Southbound Connect Concept and Constraints**: "Southbound Connect" allows domestic investors to invest in bonds traded in the Hong Kong bond market through the interconnection of relevant basic service institutions between the Chinese mainland and Hong Kong. The relevant funds can only be used for bond investment, and illegal currency arbitrage is prohibited. The annual quota is 500 billion yuan equivalent, and the daily quota is 20 billion yuan equivalent [1][24][25] - **Southbound Connect Full - Process Mechanism**: The trading method is Request for Quote (RFQ). It adopts a nominal holder system for custody and full - amount Delivery versus Payment (DVP) for settlement [1][28][33] 2. Review of Chinese Overseas Bonds in 2025H1: Narrowing Spreads and Relatively Attractive Returns - **Primary Market Changes**: - **Chinese US Dollar Bonds**: The primary issuance of Chinese US dollar bonds has improved, with the issuance scale from January to June 2025 reaching 89.4 billion US dollars, a 12% year - on - year increase. The issuance interest rate has fluctuated downward [2][45] - **Dim Sum Bonds**: The primary issuance of Dim Sum bonds has slightly contracted, with a 9% year - on - year decrease in the issuance scale from January to June 2025. The issuance interest rates have shown differentiation [2][53] - **Secondary Market Performance**: - **Chinese US Dollar Bonds**: The index has steadily risen, and the credit spreads have continued to repair. As of June 30, 2025, the overall return rate of Chinese US dollar bonds this year was 4.23%, better than the performance of the China Bond Index [3][61] - **Dim Sum Bonds**: Priced based on Chinese treasury bonds, they follow the narrowing of on - shore credit spreads. With the inflow of on - shore funds and the reduction of future financing costs, the spreads in the offshore market may gradually narrow [3][84] 3. Outlook for Chinese Overseas Bonds in 2025H2: Southbound Connect Expansion Facilitates Layout - **Overview of the Hong Kong Bond Market**: As of the end of 2024, the outstanding scales of Hong Kong dollar bonds, offshore RMB bonds, and G3 currency bonds were 195.5 billion, 173.2 billion, and 565.6 billion US dollars respectively. The bonds托管 by CMU are only a small part of the Hong Kong bond market [4][91] - **Investment Strategy for Chinese US Dollar Bonds**: Driven by the on - shore and offshore spread gap and the continuous advancement of debt resolution policies, urban investment US dollar bonds are expected to continue their good performance, and real estate US dollar bonds will also benefit from relevant policies. The primary supply of investment - grade financial and non - financial sectors is relatively sufficient, and the valuations are still attractive [4][112] - **Investment Strategy for Dim Sum Bonds**: Considering the Sino - US interest rate spread inversion and the cost of hedging, Dim Sum bonds are more cost - effective than Chinese US dollar bonds. With the expected influx of Southbound funds, there is a large narrowing space for Dim Sum bond spreads, so they have high allocation value [4]

Core Viewpoint - The expansion of the "Southbound Bond Connect" allows non-bank financial institutions to participate, presenting both opportunities and challenges in the context of a low-interest-rate environment [1][2]. Group 1: Opportunities for Non-Bank Financial Institutions - The inclusion of non-bank financial institutions in the "Southbound Bond Connect" meets their diversified investment needs while testing their research, risk control, and overseas bond investment capabilities [1][3]. - The expansion of "Southbound Bond Connect" provides a strategic platform for domestic brokers to internationalize, enhancing their collaborative service capabilities in both domestic and foreign markets [2][3]. - Non-bank institutions can now purchase multi-currency bonds in the Hong Kong bond market, increasing their investment flexibility and potentially improving self-operated investment returns [2][3]. Group 2: Challenges and Requirements - The participation in "Southbound Bond Connect" raises the bar for brokers' research and risk control capabilities, necessitating a global perspective and international research capabilities [3][4]. - Cross-border investments introduce variables such as exchange rate fluctuations and overseas credit risks, prompting brokers to upgrade their risk control systems [3][4]. Group 3: Development of Overseas Bond Investment Capabilities - Brokers are accelerating the development of their overseas bond investment capabilities, focusing on establishing a comprehensive risk control framework [4][5]. - Institutions with robust risk control mechanisms and talent reserves are expected to seize opportunities and expand their growth trajectories in overseas bond investments [4][5]. Group 4: System Optimization and Regulatory Coordination - There are calls for optimizing system connectivity, enhancing derivative hedging tools, and improving participation mechanisms to fully unleash the potential of "Southbound Bond Connect" [6][7]. - The need for improved cross-border regulatory coordination and dispute resolution mechanisms is highlighted, particularly regarding differences in information disclosure and investor protection between the mainland and Hong Kong [7].