China’s effort to help global investors borrow against their 3.2 trillion yuan in domestic bond holdings is gaining traction, even as legal friction and low yields limit broader participation.
Monthly repurchase agreements, known as repos, by offshore institutions reached 1.2 trillion yuan in August, more than double the 573 billion yuan recorded a year earlier, according to data from China Central Depository & Clearing Co. The surge follows a decision last September to grant more foreign investors access to the tool, which lets them raise short-term onshore yuan by selling bonds with an agreement to buy them back later.
“Investors can now deploy Chinese government bonds to meet liquidity needs,” said Charles Lam, head of markets for Citigroup Inc. in Hong Kong. “That has materially improved the efficiency and attractiveness of the market.”
Yet, despite the recent surge, foreign activity in China’s repo market remains a tiny fraction of overall turnover. Overseas institutions own about 2% of China’s onshore bonds, but their repo trades accounted for just 1.2% of total market volume last month, according to Bloomberg calculations based on CCDC data.
The modest increase points to a gradual, cautious opening of onshore markets. Beijing remains eager to expand foreign access through channels like China Interbank Bond Market Direct and Bond Connect, which allow offshore investors to trade and borrow against onshore holdings. However, broader participation continues to be constrained by legal hurdles and low bond yields.
Regulators updated rules last year to let foreign investors choose between global standard contracts — Global Master Repurchase Agreement under English law or local agreements issued by the National Association of Financial Market Institutional Investors under Chinese law — to govern onshore repo deals.
The agreements serve as crucial frameworks for trading counterparties to define legal terms, including risk controls and default resolution.
The market still needs to align on contract choices between English and Chinese law, as well as questions around close-out netting, bankruptcy risks, and operational rules, according to John Luk, head of FX linear and emerging market rates trading for Asia Pacific and Middle East at Crédit Agricole CIB.
Negotiation of GMRA typically takes three to six months, further pacing the market’s expansion, according to Priscilla Chen, a senior consultant at Ashurst Perkins Coie.
“Over the past year, most clients that expressed interest in repo transactions have been Chinese financial institutions in Hong Kong looking to establish GMRA relationships so they can trade with a broader range of offshore investors,” Chen said.
Growth among foreign investors has been driven mainly by outright repos, where ownership of the bond is transferred to the buyer rather than frozen in the seller’s account as in a traditional pledged repo. Outright repos accounted for 23% of foreign settlement volumes in August, up from about 4% a year earlier, according to Bloomberg calculations based on CCDC data.
“The substantial rise of outright repo transactions is driven by rising foreign private sector investors’ transactions in China’s onshore repo market,” said Becky Liu, head of Greater China strategy at Standard Chartered Bank.
Beyond documentation, China’s low interest rate environment remains a primary headwind. While cheap yuan borrowing costs are appealing, a record yield gap between benchmark Chinese sovereign bonds and US Treasuries leaves onshore debt with little return relative to global peers.
That challenging macroeconomic backdrop and low domestic rates are weighing on international investor appetite for Chinese debt, according to Kimi Liu, head of regulatory and compliance at Clifford Chance He Ping Joint Operation Office.
At the same time, regulators are introducing measures to enhance the utility of Chinese government bonds, including promoting their use as collateral, Liu said, adding that the goal is to expand how they can be used so as to make them more attractive.
To unlock broader international demand, market participants are eyeing deeper integration across financial products and an expanded role for Hong Kong as an offshore yuan hub.
“The next stage is about combining repo, foreign exchange, and hedging solutions,” said Cheuk Wong, head of markets and securities services at HSBC Holdings Plc in Hong Kong. This will allow foreign investors to “use their balance sheets more efficiently across borders.”
With assistance from Julia Zhong.
This article was generated from an automated news agency feed without modifications to text.
