1. Report Industry Investment Rating No information about the report industry investment rating is provided in the content. 2. Core Viewpoints of the Report - Southbound Connect is an important exploration of China's financial market interconnection. Banks' proprietary trading is the most important investor under the current mechanism and is expected to expand. The annual quota for Southbound Connect is RMB 50 billion equivalent, and investors can choose either multi - level direct connection custody or domestic custody and clearing banks to hold their bond assets, with strict cross - border capital supervision. - As of the end of 2024, the total scale of the Hong Kong bond market exceeded USD 900 billion. It includes the offshore RMB bond market, the Hong Kong dollar bond market, and the Asian G3 currency bond market. G3 currency bonds, especially US dollar bonds issued by Chinese - funded institutions, are an important part of the Hong Kong market. - In the future, with the expansion of the scope of institutions, Southbound Connect will become an important starting point for domestic institutions' overseas bond investment. It is recommended to actively seize overseas opportunities and carefully manage exchange - rate risks [1]. 3. Summary According to Relevant Catalogs 3.1 China's Financial Market Opening and the Birth of Bond "Southbound Connect" - China's capital market opening process can be divided into three stages: "early opening attempts - expansion of cross - border investment channels - capital market interconnection". Bond "Southbound Connect" is an important exploration in the interconnection stage. - In 2016, the concept of Bond Connect was first proposed. In 2017, Northbound Connect was officially launched, and in 2021, Southbound Connect was launched. Since 2025, regulators have repeatedly mentioned Southbound Connect, clarifying that investors will be expanded to four types of non - bank institutions: securities firms, funds, insurance, and wealth management [4]. 3.2 Analysis of the Bond Southbound Connect System - Participants in Southbound Connect include market - makers and investors. Banks' proprietary trading is the most important investor under the current mechanism. The trading service variety is initially spot bond trading, and the investable bonds are all bond types issued overseas and traded in the Hong Kong bond market. - The annual quota for Southbound Connect is RMB 50 billion equivalent, and the daily quota is RMB 20 billion equivalent. Domestic investors participate in Southbound Connect transactions through the request - for - quote method. - Southbound Connect adopts the nominee holder system. Investors can choose to hold their bond assets through multi - level direct connection custody or domestic custody and clearing banks, with strict cross - border capital supervision. The expansion of Southbound Connect is beneficial for optimizing the investor structure [5]. 3.3 Introduction to the Hong Kong Bond Market - Classified by currency, the Hong Kong bond market includes the offshore RMB bond market, the Hong Kong dollar bond market, and the Asian G3 currency bond market. The Hong Kong dollar bond market has grown steadily in recent years; the offshore RMB bond market expanded significantly in 2024; the issuance scale of the G3 currency bond market rebounded in 2024, with Chinese - funded issuers being the main ones. - Classified by issuer, the Hong Kong bond market can be divided into (quasi -) sovereign bonds and corporate bonds. The former includes Hong Kong government bonds, bonds issued by the Hong Kong Monetary Authority, bonds issued by mainland (quasi -) sovereign institutions, and bonds issued by overseas (quasi -) sovereign institutions. The latter includes bonds issued by recognized institutions, public institutions, and private institutions [6].

Core Viewpoint - The establishment of the Shanghai Offshore Economic Function Zone is a strategic move in response to the profound adjustments in the global financial landscape, aiming to enhance Shanghai's international financial center capabilities and facilitate the internationalization of the Renminbi from "trade settlement" to "reserve currency" [1] Institutional Innovation - The core competitiveness of the Shanghai Offshore Economic Function Zone lies in a regulatory framework that aligns with international practices while incorporating Chinese characteristics, emphasizing "transparent rules + precise regulation" [2] - The zone will implement a "boundary management" approach, allowing foreign capital to flow freely while ensuring that offshore activities do not disrupt the onshore financial system [2] Business Environment Innovation - The average approval time for foreign financial institutions to set up offshore business departments in China is currently 187 days, significantly longer than the 4-week standard in Dubai. The zone aims to reduce this to 30 days through a "commitment system + full-process supervision" [3] - The zone will promote a "multi-currency fund pool + blockchain clearing" model to enhance cross-border settlement efficiency, targeting a significant increase in corporate fund turnover rates by 2025 [3] Tax Policy Design - The zone will adopt a "low tax + strong regulation" policy, proposing a 5% capital gains tax and zero VAT for offshore financial activities, while implementing strict anti-tax avoidance measures [4] - A "tax neutrality + anti-avoidance" mechanism will be established to prevent tax arbitrage and ensure compliance in offshore operations [4] Legal and Regulatory Coordination - A "special legal application zone" will be created to allow international commercial contracts to choose applicable laws, enhancing the legal framework for offshore operations [5][6] - A joint regulatory meeting involving the central bank, foreign exchange bureau, and financial regulatory authorities will oversee offshore financial activities, promoting innovation while managing risks [6] Business Ecosystem - The zone will focus on providing comprehensive services for cross-border trade and investment, particularly for countries involved in the Belt and Road Initiative [7] - The offshore bond market will be a key focus, with targets set for issuance and financing for infrastructure projects by 2026 [8] Internal and External Coordination - The zone will establish a network linking itself with Hong Kong and global nodes, facilitating risk isolation and collaborative value release [12] - A "Shanghai-Hong Kong offshore financial express" mechanism will be implemented to allow for the flow of funds based on real trade backgrounds [13] Risk Prevention - A "prevention-monitoring-disposal" risk control system will be established to mitigate concerns about risk spillover [16] - The zone will implement strict account management to ensure complete separation between offshore and onshore accounts, with rigorous transaction verification processes [17] Ecological Support - The zone will develop a talent system to attract and cultivate international financial professionals, aiming to increase the proportion of foreign talent by 2025 [21] - High-level infrastructure will be enhanced to improve global competitiveness, including the establishment of a global offshore financial data port [22]

Core Viewpoint - Offshore financial centers are essential components of international financial systems, facilitating the internationalization of the Renminbi and supporting the development of a comprehensive international financial framework [1][2][22]. Group 1: Role of Offshore Financial Centers - Offshore financial centers provide broader funding sources and resource allocation platforms, promoting efficient global capital flow [4]. - They foster financial innovation and business expansion by offering a favorable regulatory environment [4]. - Offshore financial centers assist in risk management and market stability by providing diverse financial tools and services [4]. Group 2: Promotion of Renminbi Internationalization - Offshore financial centers offer platforms for Renminbi trading and investment, attracting more international investors [5]. - They enhance the international influence of the Renminbi by increasing its usage in international payments, settlements, and investments [5]. - These centers support Chinese enterprises in their global expansion efforts, facilitating resource integration and investment [5]. Group 3: Relationship Between Offshore Financial Centers and Offshore Jurisdictions - Offshore jurisdictions provide the institutional environment necessary for offshore financial activities, characterized by low tax rates and relaxed regulations [7][8]. - The synergy between offshore financial centers and their jurisdictions creates a flexible international financial network [7]. Group 4: Compliance and Regulation - Offshore financial centers operate under strict international regulatory frameworks, ensuring compliance with anti-money laundering and tax transparency standards [10][11]. - They actively share financial account information with tax authorities to prevent tax evasion and enhance financial transparency [11][13]. Group 5: Strategic Development of Offshore Financial Centers in China - China aims to develop offshore financial centers in Shanghai and Shenzhen, aligning with international standards to enhance the internationalization of the Renminbi [17][22]. - Proposed measures include creating a conducive regulatory environment, optimizing the business ecosystem, and establishing a robust risk management framework [18][20].

Core Viewpoint - The People's Bank of China and the Hong Kong Monetary Authority announced three measures to optimize the Bond Connect program, particularly expanding the investor base for the "Southbound" channel to include more non-bank financial institutions [1] Group 1: Expansion of Investor Base - The "Southbound" channel will now allow securities firms, funds, insurance companies, and wealth management firms to participate, broadening the investment opportunities for domestic investors [1][2] - Currently, only 41 bank-type financial institutions and qualified domestic institutional investors (QDII and RQDII) can invest through the "Southbound" channel [1] Group 2: Benefits for Non-Bank Financial Institutions - The expansion provides non-bank institutions with a wider global asset allocation channel, enhancing flexibility and potential returns on investments [2] - Multi-currency and multi-market allocations will help mitigate the impact of interest rate fluctuations in a single market, thereby increasing risk resilience [2] - Non-bank institutions can dynamically adjust their domestic and foreign asset allocation ratios, leveraging differences in monetary policies across regions to alleviate operational pressures [2] Group 3: Market Impact and Future Outlook - The increase in market participants is expected to bring more incremental funds to the Hong Kong bond market, improving liquidity and trading scale [3] - As of May this year, the "Southbound" channel has facilitated the trading of 918 bonds with a balance of 532.94 billion yuan [3] - Future enhancements may include the introduction of derivatives like interest rate swaps and options to meet institutional hedging needs [3]

Group 1 - The National Financial Regulatory Administration has approved Banco Santander to establish a branch in Shenzhen, marking the addition of a European bank in the region [1] - By the end of 2024, Shenzhen will have 38 foreign-funded banks, including 5 legal entities and 33 branches, with total assets exceeding 400 billion RMB [1] - Banco Santander, founded in 1857, is Spain's largest commercial bank with total assets of 1.8 trillion euros and a net profit of 13.744 billion euros in 2024 [1] Group 2 - Nine foreign banks in Shenzhen have joined the "Cross-Border Wealth Management Connect" pilot program, facilitating cross-border investment for residents in the Greater Bay Area [2] - The total amount of cross-border fund transfers has exceeded 1.6 billion RMB, accounting for nearly 80% of the total for foreign banks in the Greater Bay Area [2] - Foreign banks in Shenzhen are actively participating in the green finance market, with initiatives such as ESG-linked loans and offshore RMB bond issuance to support sustainable development [2]

Core Viewpoint - The article discusses the optimization and expansion of the Bond Connect mechanism, highlighting China's increasing efforts to open its bond market to foreign investors [1][4]. Group 1: Bond Connect Expansion Measures - The People's Bank of China announced several measures to expand the Bond Connect, including broadening the participant scope for the southbound channel to include four types of non-bank institutions such as brokerages, funds, insurance, and wealth management [2][5]. - The offshore repurchase mechanism will be optimized, allowing bonds to be re-pledged during the repurchase period, thus enhancing liquidity management for foreign investors [6]. - The swap connect mechanism will also be improved to better meet investors' interest rate risk management needs, with an expanded pool of quote providers and adjusted daily trading limits [7]. Group 2: Market Potential and Demand - Despite China being the second-largest bond market globally, international investors hold only 3% of Chinese bonds, indicating significant room for growth in foreign investment [3][18]. - The issuance of offshore RMB bonds in Hong Kong is expected to exceed 1 trillion RMB in 2024, reflecting a 37% year-on-year increase, which will likely drive up investment demand [10]. - The Hong Kong Monetary Authority and the Securities and Futures Commission are preparing to increase the supply of offshore RMB bonds and enhance the secondary market's liquidity [11][12][13]. Group 3: Future Outlook - The article emphasizes the need for a one-stop account opening platform for foreign investors and the establishment of a comprehensive product system in the offshore RMB financial market to improve liquidity [8]. - The bond market's infrastructure will be optimized to provide a more efficient and transparent trading platform for offshore RMB assets [14][15]. - There is an expectation that the proportion of international investors holding Chinese bonds could double, driven by increasing demand and the expansion of bond varieties [19].

Group 1 - The core point of the news is the approval of Banco Santander to establish a branch in Shenzhen, marking its third presence in China after Shanghai and Beijing, and reflecting the ongoing expansion of foreign financial institutions in the region [1][4][10] - Banco Santander, as Spain's largest commercial bank, has a significant global presence with total assets of €1.8 trillion and annual revenue of €61.876 billion as of the end of 2024 [1][4] - The establishment of the Shenzhen branch aligns with China's financial opening policies, which have seen over 50 measures introduced since 2018 to facilitate foreign investment in the banking sector [4][9] Group 2 - Shenzhen has become a hub for foreign banks, with 38 institutions having total assets exceeding 400 billion RMB, ranking among the top in the country [5][6] - The historical context of foreign banks in Shenzhen dates back to 1982, with significant milestones including the establishment of the first foreign bank and the introduction of various international banking giants [5][6] - Recent developments indicate a trend of foreign banks increasing their presence in Shenzhen, supported by favorable policies and the city's strong economic performance [6][9] Group 3 - Foreign banks in Shenzhen are actively participating in cross-border financing and settlement, with significant contributions to the "Cross-Border Wealth Management Connect" pilot program [7] - These banks are also supporting Chinese enterprises in their global expansion efforts, leveraging their international networks to provide comprehensive services [7][8] - In the green finance sector, foreign banks are involved in innovative practices, such as ESG-linked loans and sustainable bond issuance, contributing to Shenzhen's green development initiatives [8] Group 4 - Shenzhen's favorable business environment, recognized as one of the best in the country, has attracted a significant number of foreign enterprises, with a 21.7% increase in newly established foreign companies in 2024 [9][10] - The city continues to enhance its policies to attract foreign investment, with new measures introduced to optimize the international business environment [9][10] - The ongoing development of foreign financial institutions in Shenzhen reflects China's commitment to high-level financial openness and a mutually beneficial financial development framework [10]

Core Viewpoint - The approval for Banco Santander to establish a branch in Shenzhen signals foreign investors' confidence in the Chinese economy and the Guangdong-Hong Kong-Macao Greater Bay Area market [1] Group 1: Banco Santander's Expansion - Banco Santander, established in 1857, is Spain's largest commercial bank and a globally significant bank, with total assets reaching €1.8 trillion and net profit of €13.744 billion by the end of 2024 [1] - The bank has been actively expanding in China, having previously established branches in Shanghai and Beijing in 2008 and 2014, respectively [1] Group 2: Foreign Investment in China's Financial Sector - Since 2018, over 50 measures have been introduced to enhance foreign investment in China's financial sector, including the removal of foreign ownership limits in various financial services [2] - The recent notification from the financial regulatory authority further expands the business scope for foreign banks, encouraging more foreign institutions to invest in China [2] Group 3: Foreign Banks in Shenzhen - Shenzhen is a key destination for foreign financial institutions, with 35 foreign banks operating 5 legal entities and 33 branches, totaling over ¥400 billion in assets by the end of 2024 [8] - The presence of foreign banks has significantly contributed to the advancement of Shenzhen's financial industry, enhancing management practices and technological innovation [8] Group 4: Cross-Border Financial Services - Nine foreign banks in Shenzhen are participating in the "Cross-Border Wealth Management Connect" pilot program, facilitating cross-border investment for residents in the Greater Bay Area [9] - These banks are also involved in cross-border data verification and credit information sharing, improving efficiency in corporate financing processes [9] Group 5: Support for Chinese Enterprises Going Global - Foreign banks leverage their global resources to provide comprehensive financial services for Chinese enterprises expanding overseas, including credit, bond issuance, and risk management [11] - Collaborations between foreign banks and Chinese companies are evident in various international markets, such as Southeast Asia [11] Group 6: Green Finance Initiatives - Foreign banks in Shenzhen are actively participating in the green finance sector, supporting low-carbon transitions and sustainable development projects [13] - Initiatives include issuing offshore RMB bonds and facilitating ESG-linked loans, showcasing the banks' commitment to environmental sustainability [13]

Core Viewpoint - The Hong Kong Securities and Futures Commission (SFC) is implementing three strategic measures to enhance Hong Kong's position as an offshore RMB center, focusing on expanding the bond market and improving liquidity for international investors [1][2][3]. Group 1: Bond Market Development - The SFC aims to increase the issuance of fixed income products in the primary market, particularly offshore RMB bonds, which saw a 37% year-on-year increase, surpassing 1 trillion RMB in 2024 [4]. - The People's Bank of China and the Hong Kong Monetary Authority announced measures to optimize the Bond Connect program, expanding the range of participating institutions and enhancing the offshore RMB bond repurchase business [2][4]. - The SFC encourages more institutions and enterprises to issue "dim sum bonds" in Hong Kong, capitalizing on favorable financing conditions due to low offshore RMB interbank offered rates [4]. Group 2: Liquidity Enhancement - The SFC is focused on improving liquidity in the secondary bond market, which is essential for providing competitive pricing conditions for issuers and attracting a broader investor base [6]. - Development of derivative products is crucial for bond investors to hedge risks and manage liquidity, with a notable increase in trading volumes for RMB-related derivatives [7]. Group 3: Infrastructure Optimization - The SFC is researching the establishment and optimization of supporting infrastructure for offshore RMB products, including trading systems and back-office support [8]. - Collaboration with financial market infrastructure providers aims to enhance the robustness of Hong Kong's financial system and improve the efficiency and transparency of offshore RMB asset transactions [8].

Group 1: Offshore Renminbi Market - In June, both offshore (CNH) and onshore (CNY) Renminbi appreciated against the US dollar, with CNH closing at 7.1575 and CNY at 7.1656, representing increases of 0.68% and 0.41% respectively compared to the previous month [3][4] - The average daily spread between CNY and CNH increased by 5 basis points to 66 basis points [3] - The CFETS Renminbi exchange rate index and indices based on BIS and SDR currency baskets decreased by 0.64%, 0.86%, and 0.86% respectively [3] Group 2: Offshore Renminbi Bond Market - In June, the offshore Renminbi bond market issued 100 bonds, an increase of 12 bonds from the previous month, with a total issuance amount of 779.71 billion, reflecting a 124.8% increase [5] Group 3: Offshore Renminbi Currency Market - As of the end of June, the CNH HIBOR rates for overnight, 7-day, 3-month, and 1-year were 1.9454%, 1.8341%, 1.9045%, and 1.9882% respectively, showing a mixed trend with overnight rates decreasing by 10 basis points while the others increased [6] - The average interest rate spread between offshore and onshore borrowing rates increased for overnight, 7-day, and 3-month terms, while the 1-year term remained unchanged [6] Group 4: Cross-Border Trade and Deposits - In May 2025, offshore Renminbi deposits in Hong Kong decreased by 5.4% to 9756.08 billion, while Taiwan saw a 4.2% increase to 1174.34 billion [2] - Cross-border trade settlement in Hong Kong amounted to 11235.7 billion, a decrease of 17.5% from the previous month [2] Group 5: Offshore Derivatives Market - In June, the 1-year CNH swap points rose by 99 basis points to -1746 basis points, while CNY swap points increased by 194 basis points to -1866 basis points [4] - The trading volume for USD/CNH futures contracts on the Hong Kong Stock Exchange increased by 14.68% to 2.527 million contracts, while the open interest decreased by 14.68% to 33,600 contracts [4]