China, Hong Kong central banks explore extending repo trading to Bond Connect

HONG Kong and China’s central banks are exploring the possibility of enabling investors to trade repurchase agreement (repo) transactions on the Bond Connect, the mutual investment channel that links up China’s US$18 trillion onshore bond market with overseas investors.

Such an addition could help increase the liquidity of the yuan bond held by investors who use the Bond Connect to access the onshore market, said Gao Fei, deputy director general of the financial market department of the People’s Bank of China in Shanghai on Tuesday (Jul 4).

Gao was speaking at the Bond Connect 6th anniversary summit, which was held concurrently in Shanghai and Hong Kong.

Launched in 2017, the Bond Connect is a joint venture between the Hong Kong Exchanges & Clearing and China Foreign Exchange Trade System (CFETS), which is managed by the PBOC.

As of the end of May, foreign investors held about 3.2 trillion yuan (S$597.9 billion) bonds that they bought via the Bond Connect, he said.

A repo trade allows a borrower to offer high-quality or risk-free securities, such as government bonds, as collateral to raise cash, usually overnight. The borrower then repays the loans plus an interest and gets their bonds back.

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Bankers said enabling repo on the Bond Connect could help offshore bondholders access China’s onshore funding.

Gao did not provide further detail on the plan. This will however be the next step to develop more risk management tools for investors after the Swap Connect, which is the mutual access programme that connect China and Hong Kong’s interest rate derivative markets launched in May.

Establishing a repo trading platform on the Bond Connect can help develop Hong Kong as an international financial risk management centre, said Eddie Yue, chief executive of the Hong Kong Monetary Authority, at the same event. REUTERS