HKMA’s renminbi repo plans boost hopes for onshore access

The Hong Kong Monetary Authority’s (HKMA) recently outlined plans to allow Bond Connect investors to repo their Chinese bond holdings in the offshore market signals progress towards opening the country’s larger onshore repo market to international investors, say market participants.

“This is very encouraging and probably the first step, or like a pilot programme, to fully open up the onshore repo market,” says Ricco Zhang, senior director for Asia-Pacific at the International Capital Market Association (ICMA).

International investors are demanding access to China’s repo market as their exposure to renminbi bonds has increased in recent years through initiatives such as Bond Connect and the CIBM Direct scheme. However, no repo market exists offshore for the bonds, and currently only sovereign institutions and renminbi-settling banks can trade in the onshore repo market.

Under the HKMA’s new provisions, investors who have purchased bonds through Northbound Bond Connect can engage in repos in the offshore market with one of the 11 designated primary liquidity providers, according to a press release published on January 13.

The proportion of bonds bought via Northbound Bond Connect is significant. At the end of December, 2.27 trillion yuan ($310 billion) of bonds held by CCDC were bought through the CIBM Direct Scheme, and 690.36 billion yuan through Northbound Bond Connect.

The announcement expressly allows the use of the Global Master Repurchase Agreement

Andrew Fei, King & Wood Mallesons

The exact launch date and operational details are still to come, but the HKMA said in the release that this “is scheduled to commence soon”.

HKMA’s announcement came almost one year after the People’s Bank of China released a draft proposal to open up the onshore repo market. ICMA’s Zhang says the move is a first step toward allowing access to the onshore repo market.

“Repo is in high demand [and] this programme is responding to such market demand. To introduce the offshore repo with onshore bonds as collateral is seen as a warm-up for the opening up of the onshore repo market to international participants,” says Zhang.

Transfer market

One of the key concerns over the opening up of China’s onshore repo market to international investors is the different repo agreements used and the different types of repo contracts traded onshore and offshore.

Most repo transactions in China’s onshore market are pledged repos under the National Association of Financial Market Institutional Investors (Nafmii) Bond Repurchase Master Agreement, where repo buyers are not allowed to re-use the bonds.

In the international market, repo transactions under the Global Master Repurchase Agreement (GMRA) are title transfer repos, where the ownership of the bonds will be transferred during the repo period and buyers can reuse the bond collateral.

In 2024, a total of 1,373 trillion yuan of pledged repo was traded in the onshore China interbank market, compared with 7.8 trillion yuan of title transfer repo, according to China Central Depository & Clearing, China’s major central securities depository.

The HKMA says participants in the new scheme will be able to choose either the GMRA or the Nafmii master agreement. It also specifies that during the repo period, the ownership of the bond will be transferred, which means these are title transfer repos.

However, repo buyers can’t re-use the bond collateral, which will be locked and managed by the HKMA’s Central Moneymarkets Unit.

Experts believe the inclusion of the GMRA and the transfer of bond ownership during repos are significant steps towards aligning with global practices.

“The announcement expressly allows the use of the GMRA, and specifically says that bond ownership would be transferred to the repo buyer during the repo period. I think these items would be considered welcome developments from global market participants’ perspective, and quite groundbreaking in terms of further aligning with international practices,” says Andrew Fei, a partner at law firm King & Wood Mallesons.

The use of the GMRA in the new repo scheme was also welcomed by a legal specialist at one international dealer.

“It is unlikely the Nafmii master agreements will be used as nine out of the 11 market-makers are overseas entities and they are trading with Northbound Bond Connect users that are also overseas,” says the legal specialist.

“[Barring collateral re-use] is a turnoff for foreign investors, but it also limits the impacts on the CNH market. Hopefully, if the market operates smoothly after the launch, regulators will lift the restriction.”

The HKMA’s move comes amid growing acceptance of Chinese government bonds as collateral. The Hong Kong Exchange’s OTC Clear service last week announced it now accepts the bonds as collateral as margin for interest rate swaps traded on the Swap Connect service, and LCH is expected to follow suit this year.

This article originally appeared in sister title Risk.net