"Early next week, we will report the new bond repo policy to headquarters. This is significant positive news for revitalizing our RMB bond asset liquidity management," said Liu Haoran, Asia-Pacific bond investment director at a foreign asset management institution, speaking to reporters on September 27.
On September 26, the People's Bank of China, China Securities Regulatory Commission, and State Administration of Foreign Exchange jointly issued an announcement on further supporting foreign institutional investors in conducting bond repo operations. The announcement supports all foreign institutional investors in the interbank bond market to participate in bond repo operations, including all foreign institutional investors entering the market through direct access and Bond Connect channels.
Multiple industry insiders stated that the comprehensive opening of bond repo operations to foreign institutional investors can not only better meet their asset liquidity management needs but also continuously enhance the international attractiveness of RMB bond assets, supporting RMB internationalization.
Liu Haoran told reporters that over the weekend, the investment team worked to organize the trading, custody, settlement, and foreign exchange operational processes involved in bond repo operations, as well as the compatibility of related operations with international operational practices, striving to quickly gain approval from headquarters' investment committee to conduct bond repo operations and add new investment quotas.
Tan Yue, head of an Asian multi-strategy fund with long-term participation in emerging market bond investments, revealed to reporters that in recent years, after passively purchasing several hundred million yuan worth of Chinese government bonds following the FTSE Russell World Government Bond Index, they similarly face high RMB bond liquidity management needs. With foreign institutional investors now permitted to participate in bond repo operations, they can timely swap funds through bond repo operations, effectively improving the fund's overall asset liquidity management standards, making senior management more optimistic about the investment value of RMB bonds.
**Addressing Three Major Pain Points of Bond Selling for Funding**
Data shows that as of the end of August 2025, 1,170 foreign institutions from over 80 countries and regions held approximately 4 trillion yuan in Chinese bonds.
Correspondingly, foreign institutional investors' RMB bond asset liquidity management needs have become increasingly prominent.
"Especially when European and American financial markets experience severe volatility, European and American investment institutions often need to pledge or repo emerging market bonds to quickly raise funds to fill margin gaps in European and American asset portfolios. This drives up demand for RMB bond repo pledge financing," Liu Haoran told reporters.
Since 2015, relevant departments have allowed three types of institutions - foreign sovereign institutions, foreign RMB business clearing banks, and foreign participating banks - to conduct bond repo operations in the interbank bond market. However, before the announcement, foreign banks, insurance companies, trust companies, pension funds, asset management products, mutual funds, hedge funds, and other investment entities mainly raised funds by selling Chinese government bonds.
Through multiple sources, reporters learned that many foreign institutional investors found that selling Chinese government bonds for funding often involves three major problems: first, the stability of hold-to-maturity investment strategies for RMB bonds is impacted; second, trading costs increase - when overseas institutional investors repurchase Chinese government bonds, they need to pay additional transaction fees; third, investment risks increase - when the repurchase price of Chinese government bonds is higher than the original selling price, overseas investment institutions believe they face higher holding costs and investment risks.
"In recent years, foreign institutional investors have maintained communication with Chinese financial regulatory authorities, hoping to open bond repo operations to all foreign institutional investors, both solving their RMB bond asset liquidity management problems and avoiding the above three operational pain points," Tan Yue revealed.
In her view, the announcement can also solve many troubles faced by foreign institutional investors participating in over-the-counter bond repo operations. Previously, the multi-strategy fund she works for attempted RMB bond pledge financing in Singapore's over-the-counter trading market. Due to the lack of bond transfer and usable transparent mechanisms and third-party custody models, plus expensive quotes from offshore funding providers, she directly stated this operation was "not worth the cost," almost consuming most of the Chinese bond investment returns.
"This year, we participated in offshore repo operations using Bond Connect northbound bonds as underlying assets. Currently, this business is still developing, and market maker quotes haven't reached our expected values, so actual participation is limited," Tan Yue said. Now the fund investment team she works for has high expectations for the announcement, as they believe the trading activity and market-based pricing of bond repo operations in the domestic interbank bond market will help them better manage Chinese bond asset liquidity and further enrich Chinese bond investment strategies.
**Foreign Capital's "Focus Points"**
Through multiple sources, reporters learned that after the announcement, many foreign asset management institutions quickly studied specific operational rules for bond repo operations over the weekend.
"We are mainly concerned about whether underlying bonds can achieve transfer and usability during bond repo operations, and whether related operational models comply with international operational practices," said Han Wei, Asia-Pacific investment director at a European bond investment FOF institution. These issues will largely influence whether FOF institutional investment committees can quickly approve their RMB bond repo operations.
Reporters learned that bond repo operations include two forms: pledge repo and outright repo. The repo form initially applicable to foreign institutional investors is mainly outright repo. In the future, relevant departments will allow foreign institutional investors to conduct pledge repo operations when conditions are mature.
The reason is that China's pledge bond repo operations have long differed from international market bond repo operations in operational aspects. Specifically, China's pledge bond repo does not transfer pledge repo underlying bonds from the repo party to the reverse repo party but freezes them with the repo party. However, in international markets, mainstream bond repo models all adopt the practice of underlying bond transfer and usability, similar to outright repo in the interbank bond market. Therefore, relevant departments will improve related operational rules, promote bond pledge repo operations to achieve underlying bond transfer and usability, ensure clear operational rights and responsibilities and convenient default disposal, before opening to foreign institutional investors.
Additionally, foreign institutional investors are particularly concerned about the delivery versus payment (DVP) settlement mechanism and fund arrival timeliness for bond outright repo operations, as well as whether bond repo quota limits can meet asset liquidity management requirements.
Regarding bond repo quota settings, the positive repo financing balance for sovereign institutions, RMB clearing banks, and participating banks shall not exceed 100% of bond holdings, while other types of foreign investment institutions' positive repo financing balance shall not exceed 80% of bond holdings in the initial stage, with future adjustments based on circumstances.
Liu Haoran believes this repo quota limit can effectively meet foreign investment institutions' RMB bond asset liquidity management needs while avoiding RMB bond investment risks derived from individual foreign investment institutions using bond repo operations to significantly increase investment leverage.
"Under controllable leveraged investment risks, we will consider moderately increasing the leveraged investment proportion of RMB bonds through bond repo operations, thereby thickening the overall returns of RMB bond investment strategies, as this helps persuade headquarters to add Chinese bond investment quotas," he noted.
Through multiple sources, reporters learned that in addition to supporting the opening of bond repo operations to all foreign institutional investors, the central bank is actively promoting Chinese mainland bonds to become widely accepted qualified collateral in Hong Kong and global markets, including supporting the Hong Kong Monetary Authority to accept mainland bonds as eligible collateral for RMB liquidity funding arrangements, as well as margin for various derivative business operations through Swap Connect and the OTC Clearing Hong Kong Limited (OTCC), further enhancing the operational space for RMB bonds as liquidity management tools and attracting more foreign investment institutions to actively increase their holdings of RMB bonds.