China is set to provide global investors holding onshore bonds with more fundraising options as part of a ‘last-mile’ reform aimed at further opening its financial markets and reinforcing Hong Kong’s status as an offshore yuan hub, the South China Morning Post reported.
Last week, Pan Gongsheng, governor of the People’s Bank of China (PBOC), introduced the latest initiatives to support Hong Kong’s development and enhance cross-border connect schemes. Two of the measures are expected to relax capital-flow controls, enabling foreign investors to achieve higher returns and improve liquidity management, according to industry experts.
The PBOC and the Hong Kong Monetary Authority (HKMA) will permit global investors to use onshore Chinese bonds as collateral for repurchase agreements (repos) under the Northbound Bond Connect scheme, effective February 10.
Onshore bonds issued by the Ministry of Finance and policy banks on the mainland under the same program will also be eligible for use as margin collateral in derivatives transactions at OTC Clearing Hong Kong, a clearing and settlement counterparty established by Hong Kong’s stock exchange. This measure is anticipated to take effect in the first quarter.
Until recently, onshore Chinese bonds were regarded as a ‘less flexible investment option’ for overseas investors, as they could not be used as collateral in repos, collateral financing transactions, or as margin collateral for other activities, according to William Shek, head of markets and securities services for Hong Kong at HSBC Holdings.
‘These new measures mark a significant uplift in their utility, allowing onshore bonds to be used as collateral in overseas markets for the first time’, he said. More potential use cases, like cross-currency repos, could emerge, Shek added.
A year ago, the PBOC and the HKMA committed to opening the onshore repo market to all foreign institutional investors, though the implementation has yet to take place.
‘Regulators are cautious about opening up the repo market, as it involves capital inflows and outflows, trading leverage, borrowing, and direct cross-border lending,’ said Lillian Tao, head of China macro and global emerging-market sales at Deutsche Bank.
Amid the complexities brought by a slowing economy at home and a new regime in Washington, Chinese regulators need to consider how to gradually relax rules and make the currency and capital move more freely and become internationally fungible, she said.