China plans to give global investors holding the country’s onshore bonds more options in terms of fundraising, in a so-called “last-mile” reform that further opens the nation’s financial markets and supports Hong Kong’s role as an offshore yuan hub.
The onshore bonds issued by the Ministry of Finance and the policy banks on the mainland under the same programme will also be used as margin collateral for derivatives transactions at OTC Clearing Hong Kong, a counterparty established by Hong Kong’s stock exchange to provide clearing and settlement services. This measure is expected to be effective in the first quarter.
Until recently, onshore Chinese bonds were considered a “less flexible investment option” for overseas investors because they could not be used as collateral in repos, collateral financing transactions, or as margin collateral for other activities, said William Shek, the head of markets and securities services for Hong Kong at HSBC Holdings.
“These new measures mark a significant uplift in their utility, allowing onshore bonds to be used as collateral in overseas markets for the first time,” he said. More potential use cases, like cross-currency repos, could emerge, Shek added.
Since the launch of the Bond Connect scheme in July 2017, foreign investors’ holdings of onshore Chinese bonds surged 4.7 times to 4.16 trillion yuan (US$568 billion) as of 2024.