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Hong Kong's ambition to launch a bond connect program that links debt markets on the mainland and globally may not be realized so long as Beijing is fighting against

capital outflows amid expectations for further yuan depreciation, analysts say.

Any connect program that allows both inbound and outbound investment will likely be a one-way street for outflows at present, as US interest rates, and the greenback, look poised to rise, they believe.

The Hong Kong stock exchange recently announced its strategic plan during 2016-18 to explore mutual market access with the mainland in the institutional cash bond market, after launching the landmark Shanghai-Hong Kong Stock Connect at the end of 2014.

However, a bond connect seems much more complicated as the majority of the mainland domestic bonds are traded in the interbank market instead of in the exchange.

In addition to technical barriers, analysts say a bond connect does not seem to be the priority for Beijing for now since it is trying to stabilize its sluggish economy and weakening currency.

Sufficient liquidity and low bond-yield levels on the mainland strengthened demand among domestic investors to seek higher returns in overseas markets, said a fixed-income analyst at a Chinese brokerage in Beijing. "However, China has been tightening controls on the capital account to ease fund outflow pressures. It seems the bond connect is not likely to be rolled out in the short term."

The mainland's central bank and commercial banks sold a net 629 billion yuan ($95.61 billion) worth of foreign exchange in December, nearly triple the amount in the previous month, amid growing capital outflows.

Beijing has stepped up efforts to ease outflow pressures in the past few months by introducing measures to restrict cross-border flows, including the suspension of new applications for the Renminbi Qualified Domestic Institutional Investor investment program and yuan account financing.

Beijing's latest move was to set a $5,000 limit for each premium payment transaction made in Hong Kong using UnionPay cards issued in the mainland, effective Thursday.

Foreign investors remain quite bearish on the yuan, especially after the Bank of Japan reduced interest rates to negative territory last week.

Reuters data on Monday showed riskier bets that only pay out if the yuan weakens to more extreme levels well above 7 per US dollar, past highs hit around Beijing's reference rate adjustment last August. On Thursday, the yuan was trading at 6.5776 per US dollar.

(HK Edition 02/05/2016 page8)

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