China Continues to Reform Local Capital Markets, Enhancing Regulatory Oversight

China’s reform zeal appears not to be slowing, as regulators continue to make improvements to the local capital markets.

China’s regulators continue to make improvements to the local capital markets.

The People’s Bank of China (PBOC) recently confirmed that global investors can use their onshore bond holdings, held under Northbound Bond Connect or CIBM, as margin collateral for Northbound Swap Connect transactions, Tony Chao, Head of Securities Services, Greater China, Deutsche Bank, told flow at Sibos.

By having access to more non-cash collateral, offshore investors will benefit from cash optimisation and lower liquidity costs when using the Swap Connect channel. At the same time, the measure will make onshore bonds more attractive for offshore investors while also promoting better synergies between Bond and Swap Connect.

This initiative comes shortly after the PBOC and the Hong Kong Monetary Authority (HKMA) both announced that onshore bonds could be used as collateral for HKMA’s RMB Liquidity Facility.

Repo market reform is another priority for regulators.

“China’s onshore bond repo market is potentially opening itself up further to offshore investors currently using the CIBM,” said Chao. “This means the repo market will now be accessible to non-bank financial institutions, such as asset managers and insurance companies. We expect guidelines on this particular topic will come out in the next few months.”

China is also enhancing regulatory oversight of its domestic market.

The report China Compass: the comprehensive guide to investing in China, launched at Sibos by Deutsche Bank and law firm HanKun, explains how regulatory pronouncements in China were primarily focused on developing capital markets. Recent proposals are more about improving supervision of listed companies and securities fund institutions, along with the delisting and trading processes – measures aimed at “promoting high-quality liberalisation of capital benches”.

While China has made excellent progress liberalising its capital markets, more could still be done, particularly within the repo space reflected Sibos panelists at the session, ‘Meet the experts: Open and win-win: The China bond market’s global integration’.

“Most Chinese repo transactions are pledged, without a transfer of ownership, which is contrary to global standards, and this ultimately leads to reduced liquidity,” said Lance Chen, Head of Network Relationship Management, APAC at Clearstream.

However, on 1 November, it appeared the tide was turning. The China Daily reported that the PBOC “conducted the first operations of a new reverse repo tool and injected 500 billion yuan (US$70.3bn) into the banking system in October, boosting its policy toolkit while promoting internationalised interbank bond market development”.

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