Regulators permit more foreigners to engage in bond repos

On Friday, the central bank (PBoC), securities regulator (CSRC), and foreign exchange regulator (SAFE) cleared foreign investors to conduct bond repurchase agreements (repos) in China’s onshore market.

Some context: A repo is a short-term loan where a borrower sells a bond to a lender with an agreement to repurchase it later at a higher price, using the bond as collateral.

• Since 2015, the PBoC has allowed select foreign institutions – like central banks and sovereign wealth funds – to conduct bond repos.

Friday’s change expands that privilege to all foreign institutions participating in China’s interbank market, including foreign banks, insurers, brokerages, pension funds, asset management companies, and futures firms.

The PBoC also said it will now allow ownership of bonds used in repo transactions to be transferred.

ICYDK: Previously, bonds posted as collateral in repo deals were locked up for the life of the transaction.

• Friday’s change means the same bond can be used as collateral in multiple transactions – a process known as rehypothecation.
• This allows financial institutions to extend credit or take leveraged positions well beyond the bond’s original value.

Get smart: Rehypothecation will help foreign investors manage liquidity more efficiently, making Chinese bonds a more attractive form of collateral.

Get smarter: As the appeal of the dollar as the global reserve currency diminishes, Chinese authorities are working to position the yuan as a viable alternative.

• This move will boost foreign demand for yuan-denominated assets, thereby supporting RMB internationalization.