Allowing repurchase agreements gives Hong Kong the edge on last mile
First it was Stock Connect. Then came Bond Connect. Now it's 'Repo Connect'. Well, the last is not the official name, but market insiders have taken to calling it that because it amounts to the same thing.
It is part of a long-awaited 'last mile' opening promised by Beijing last year to promote mainland bond liquidity, ease capital controls, internationalise the yuan, and finally, further promote Hong Kong as an offshore yuan hub.
Using the Bond Connect's foreign exchange trade system, investors outside the mainland can now offer China's domestic bonds – for now the highest-rated ones – they own as collateral to borrow from financial institutions in Hong Kong.
With a repurchase agreement, or repo, they agree to buy back the collateral at a later date, usually with interest. Failure to repurchase means the buyers or lenders can sell the collateral.
With the mainland's capital controls, it has been difficult to take assets out of the country.
Creating an offshore repo market will enhance the attractiveness and liquidity of Chinese bonds to foreign investors, and to internationalise bonds issued by mainland financial institutions.
For now, 11 designated market makers in Hong Kong help provide price quotes on request for interested parties.
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