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Banking & finance
BusinessBanking & Finance

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

  • More foreign investors will be allowed to conduct repo transactions onshore as Beijing takes more measures to deepen financial ties with Hong Kong
  • As a precursor, the HKMA add Chinese government bonds, policy bank bonds as eligible collateral to its RMB Liquidity Facility from February 26

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China is readying plans to open its onshore repo market to more foreign institutional investors. Photo: Bloomberg
Aileen ChuangandPeggy Sito
China is widening access to its onshore repo market to a bigger pool of foreign institutional investors, giving access to the most liquid part of its financial markets. That heralds a transformative, “last-mile” reform to further ease controls on interest rates and capital flows, some industry players said.
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Beijing will open up the repo market to all offshore institutional investors that already have access to the interbank bond market, one of six measures to deepen the connection with Hong Kong. The effective date has not been decided. The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange concluded its market consultation process on February 23.

Access to the over-the-counter wholesale funding market is currently limited to sovereign entities, multilateral financial institutions and offshore yuan clearing banks.

Turnover in China’s interbank repo market, dominated by pledged repos, has soared over the past decade. These contracts surged 21 per cent to 1,668 trillion yuan (US$231.8 trillion) in 2023, according to central bank data. Overnight repo made up 88 per cent of the volume last year, while seven-day contracts accounted for 9.9 per cent.

“Opening up onshore repo will be viewed as the last mile in a country’s capital account liberalisation,” said Ju Wang, head of Greater China foreign-exchange and rates strategy at BNP Paribas. “Essentially, you are opening up your money market and currency’s funding to foreigners. That usually requires a lot less control of the currency, and a much more liberal exchange-rate regime.”

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