Core Viewpoint - HKEX's bond market serves as a crucial financing channel for listed companies and enterprises, supported by an international investor base, flexible issuance mechanisms, and a comprehensive legal framework [2]. Group 1: Issuance Conditions - HKEX has specific requirements for bond issuers, including the need for a compliant record and transparent financial status [8]. - Issuers must be listed companies on HKEX or meet the "qualified issuer" standards, such as large state-owned enterprises or financial institutions [8]. - Financial stability is essential, with basic financial metrics required to demonstrate debt repayment capability; while credit ratings are not mandatory, they are critical for attracting investors [8] [9]. Group 2: Types of Bonds - The HKEX bond market offers various types of bonds, allowing issuers to choose based on financing needs and risk tolerance [3]. - HKD bonds are popular among local and international investors, typically offering lower interest rates compared to USD bonds [4]. - USD bonds provide high global liquidity but come with currency fluctuation risks, suitable for large multinational corporations [6]. - RMB bonds, known as "Dim Sum bonds," have seen steady growth, appealing to investors interested in RMB assets [7][9]. Group 3: Issuance Process - The issuance process for public bonds on HKEX is standardized, involving several key steps, including preparation, HKEX review, and issuance [20]. - Issuers must engage intermediaries for due diligence and prepare a prospectus, which HKEX reviews for completeness and accuracy [20]. - After pricing and allocation, bonds are listed on HKEX, typically within 1-2 working days [20]. Group 4: Regulatory Requirements - The regulatory framework emphasizes disclosure, with multiple regulatory bodies involved in overseeing bond issuance [21]. - HKEX requires issuers to comply with listing rules, including regular financial reporting and significant event announcements [24]. - The SFC regulates the sales process to ensure investor protection, while the HKMA oversees the underwriting activities of financial institutions [24]. Group 5: Investor Base and Liquidity - Institutional investors dominate the HKEX bond market, accounting for approximately 80% of the investor base [22]. - Public bonds generally exhibit strong liquidity, while private bonds have lower liquidity and are primarily traded privately [22]. Group 6: Cost and Risk Management - Issuance costs typically range from 2% to 5% of the financing amount, including underwriting fees and legal costs [22]. - Risk management strategies include hedging against currency and interest rate risks, as well as maintaining credit ratings [22]. Group 7: Ongoing Management and Investor Relations - Issuers must adhere to strict ongoing disclosure requirements and maintain communication with investors to uphold market trust [23]. - Regular updates on financial performance and timely announcements of significant events are crucial for investor relations [23]. Summary - The HKEX bond market offers a robust platform for financing, characterized by diverse bond types, a structured issuance process, and stringent regulatory oversight, while emphasizing the importance of ongoing disclosure and investor relations [25].

Investment Rating - The report maintains a "Weaker than Market" investment rating for the industry [5]. Core Insights - The expansion of the "Bond Connect" southbound channel will provide more overseas asset allocation opportunities for mainland non-bank financial institutions, alleviating the supply tightness of quality assets in the domestic market and promoting reasonable capital flow [1]. - The U.S. inflation data for June showed a year-on-year increase to 2.7%, slightly above expectations, while core CPI rose to 2.9%, indicating controlled inflation but potential short-term increases if tariffs are raised [2]. - The derivatives market maintains expectations for two rate cuts by the Federal Reserve in September and December, with a cumulative reduction of 50 basis points anticipated by year-end [3]. - The report suggests that the current long-end U.S. Treasury yields are rising, reflecting market concerns about future inflation and fiscal deficits, while the expansion of the southbound bond market will enhance liquidity for Chinese dollar bonds and Hong Kong dollar bonds [4]. Summary by Sections U.S. Macroeconomics and Liquidity - The report highlights the controlled inflation environment in the U.S., with CPI expected to rise to 3.0%-3.5% in the short term if tariffs increase [2]. - The yield curve for U.S. Treasuries has steepened, indicating market concerns about inflation and fiscal policy [3]. Overseas Dollar Bonds - The expansion of the "Bond Connect" southbound channel is expected to create structural opportunities for dollar bond allocations, particularly benefiting Chinese dollar bonds and Hong Kong dollar bonds [4]. Chinese Dollar Bonds - The report notes that recent rating actions by international agencies included 11 adjustments for Chinese dollar bond issuers, with three upgrades and five downgrades [93].

Group 1 - The People's Bank of China and the Hong Kong Monetary Authority announced multiple measures to optimize and expand the Bond Connect "Southbound" scheme, including the inclusion of non-bank financial institutions such as brokerages, insurance companies, and asset management firms [1] - The expansion of the "Southbound" scheme is timely given the asset allocation challenges faced by mainland financial institutions, and it holds significant implications for the development of non-bank institutions and the long-term stability of both mainland and Hong Kong bond markets [1] Group 2 - The expansion broadens asset allocation channels for non-bank institutions, enhancing their global asset allocation capabilities. Previously, these institutions relied on the Qualified Domestic Institutional Investor (QDII) scheme, which had limited quotas and lengthy approval processes. The "Southbound" scheme acts as a "highway" for investing in overseas bonds, improving overall investment yield flexibility [2] - As of July 10, the yield on China's 10-year government bonds was 1.68%, while Hong Kong's was 2.99%, and the U.S. was 4.34%, indicating significant yield differentials that can optimize asset allocation [2] Group 3 - The expansion helps stabilize the mainland bond market and alleviates unilateral volatility caused by supply shortages. As of May, the bond market's custody balance in China reached 187.2 trillion yuan, ranking among the world's largest. The "Southbound" scheme acts as a "pressure relief valve" for the demand side of the mainland bond market, balancing supply and demand [3] - The annual total quota for the "Southbound" scheme is set at 500 billion yuan, with a variety of options available in the Hong Kong bond market, including Hong Kong dollar bonds and offshore RMB bonds [3] Group 4 - The expansion is expected to attract medium- to long-term funds into the Hong Kong bond market, enhancing trading liquidity. A broader and more active investor base will create a more attractive financing environment for international investors and issuers [4] - The diverse investment strategies and flexible trading models of non-bank institutions will significantly enhance the price discovery function and trading activity in the offshore RMB bond market, promoting the growth of the offshore RMB asset pool [4] - The expansion is anticipated to reshape the cross-border asset allocation ecosystem for mainland non-bank institutions, fostering the prosperity of both bond markets and advancing the internationalization of the RMB [4]