China’s repo market opens up to foreign investors, creating opportunity.

TLDR:

China is widening access to its US$232 trillion repo market for foreign investors, allowing access to the most liquid part of its financial markets. The People’s Bank of China has concluded its market consultation process and will open up the repo market to all offshore institutional investors that have access to the interbank bond market. This move is expected to ease controls on interest rates and capital flows, making a transformative impact on the financial industry.

China to widen access to US$232 trillion repo market in transformative, signalling impact on interest rates, analysts say

China is preparing to expand access to its onshore repo market, opening it up to more foreign institutional investors. This move is seen as a significant step towards easing controls on interest rates and capital flows, with the potential to transform the financial landscape.

The People’s Bank of China and the State Administration of Foreign Exchange have concluded a market consultation process and will allow offshore institutional investors with access to the interbank bond market to conduct repo transactions onshore. This will deepen the connection with Hong Kong and is considered the last mile in China’s capital account liberalization.

The interbank repo market in China has seen significant growth over the past decade, with turnover reaching 1,668 trillion yuan in 2023. Opening up the repo market will enable foreign investors to access funding at lower costs and provide a more liquid funding source.

The Hong Kong Monetary Authority will also make changes to its RMB Liquidity Facility, allowing Chinese government bonds and policy bank bonds to be used as collateral. This move aims to strengthen Hong Kong’s role as a bridge between mainland China and offshore markets.

Overall, the broadening of offshore investor access to the onshore repo market is expected to have a transformative impact on the industry, providing new financing and liquidity management options for investors. It also signals China’s ability to influence domestic interest rates to investors in Hong Kong and beyond.