China to increase bond swap transaction limit: Jiang

China to increase bond swap transaction limit: Jiang

China is poised to expand its Southbound Bond Connect program, a key channel for mainland investors to purchase overseas bonds, as part of a broader effort to liberalize financial flows. According to recent discussions, regulators are considering doubling the program's total quota to 1 trillion yuan, including a new 500 billion yuan annual allocation for non-bank financial institutions like mutual funds and insurers [1].

The proposal, which is still under regulatory review, aims to enhance access for these entities to international bonds traded in Hong Kong, including U.S. dollar-denominated debt. This move signals a significant step in China's ongoing effort to open its financial system, improve two-way capital flows, and elevate the global profile of the yuan. It comes alongside other recent reforms, such as expansions in cross-border payments and overseas investment allowances for Chinese funds [1].

While the Southbound Bond Connect expansion won't directly internationalize the yuan, it addresses concerns over China's restrictive capital controls. It could potentially boost demand for offshore yuan ("dim sum") bonds, which often offer higher yields than domestic equivalents [1].

Earlier indications of this policy shift emerged in January, when the People’s Bank of China and Hong Kong Monetary Authority discussed allowing securities firms and insurers into the program [1].

Unlike the Southbound Bond Connect, the Northbound Bond Connect, which allows foreigners to buy Chinese bonds, does not have a quota. Bond Connect remains a closed-loop system, meaning funds invested through it cannot be freely moved offshore [1].

References:
[1] https://www.tradingview.com/news/forexlive:402b3a2a6094b:0-china-eyes-plan-to-ramp-up-offshore-bond-purchases-via-southbound-connect/