China Opens Repo Market to Overseas Banks in Push on Yuan Usage

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China opened a market for short-term loans to foreign banks, giving them access to cheaper yuan funding as policy makers encourage greater global use of the currency.

All overseas yuan clearing and settlement banks that participate in the interbank bond market can conduct repurchase agreements and move the funds abroad, the People’s Bank of China said in a statement on Wednesday. There are 107 offshore lenders that can exchange debt with their local counterparts and the change will make repos possible for most of them, including HSBC Holdings Plc and Standard Chartered Plc.

The change comes as China seeks to bolster the case for the International Monetary Fund to grant the yuan reserve status later this year. The currency failed to qualify in a 2010 review because it wasn’t deemed to be freely usable. Onshore interbank short-term money rates have fallen below that of Hong Kong after the PBOC reduced interest rates three times since November and cut major banks’ reserve ratios twice this year.

“This latest move is to address the last few remaining major restrictions of China’s capital account,” said Suan Teck Kin, Singapore-based economist at United Overseas Bank Ltd. “The further opening of China’s capital account will help lower offshore funding costs and improve offshore liquidity conditions, as China keeps its eye on the the IMF’s Special Drawing Rights.”

The overnight repo rate on the interbank market has declined 272 basis points this year to 1.03 percent as of 12:04 p.m. in Shanghai, while the comparable daily fixing in Hong Kong has dropped 19 basis points to 1.64 percent.

Rate Convergence

“We are moving quickly toward a one currency, one curve system, as we have been expecting for a long time,” analysts led by Hong Kong-based Qu Hongbin at HSBC Holdings Plc wrote in a note Thursday. “The move will result in greater transmission of onshore monetary policy to the offshore market.”

The monetary authority has in the past year appointed yuan-clearing banks in 11 foreign cities, including Seoul, Sydney and Kuala Lumpur, choosing local branches of the Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and Bank of Communications Co. The PBOC started to allow central banks and overseas yuan clearing and settlement banks to invest in the domestic interbank bond market in 2010. Lenders including HSBC and Standard Chartered obtained licenses to conduct yuan settlement overseas in 2009.

Foreign Members

The National Interbank Funding Center has 107 overseas lenders as members as of Wednesday, as well as 24 Qualified Foreign Institutional Investors and 91 Renminbi QFIIs, according to data posted on its website. The programs allow foreign currency and yuan raised offshore to be invested in the local market.

Overseas institutions held 712.8 billion yuan ($115 billion) of onshore bonds at the end of March, PBOC data show. That was only 1.9 percent of the 36.7 trillion yuan outstanding, according to Bloomberg calculations based on official figures.

The PBOC’s latest move is positive for China’s bond market because investment by foreign institutions will increase given further liberalization, Guosen Securities Co. analysts led by Shanghai-based Dong Dezhi wrote in a note on Thursday.

Sovereign notes advanced, with the yield on bonds due April 2025 falling two basis points to a one-week low of 3.6 percent, National Interbank Funding Prices show.

The yuan retained its fifth ranking in global payments in April, with a market share of 2.07 percent, according to the Society for Worldwide Interbank Financial Telecommunication. It’s behind the dollar, euro, pound and the yen.