China is considering doubling the size of its Southbound Bond Connect program, a key channel for mainland investors to buy overseas bonds, in a move that signals a greater push to liberalize financial flows.
Regulators have held early talks about increasing the program’s total quota to 1 trillion yuan, including a new 500 billion yuan annual allocation specifically for non-bank financial institutions like mutual funds and insurers, which are currently excluded. This would allow these entities to gain broader access to international bonds traded in Hong Kong, including U.S. dollar-denominated debt.
No final decision has been made, and the plan would still require regulatory approval.
This proposal reflects Beijing’s wider effort to open its financial system, improve two-way capital flows, and enhance the global profile of the yuan. It comes alongside other recent reforms, including expansions in cross-border payments and overseas investment allowances for Chinese funds.
While the southbound expansion won’t directly internationalize the yuan, it addresses concerns over China’s restrictive capital controls, potentially boosting demand for offshore yuan (“dim sum”) bonds, which often offer higher yields than domestic equivalents.
Earlier signs 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.
Unlike the southbound link, 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 can’t be freely moved offshore.
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Info via a Bloomberg report overnight ICYMI
This article was written by Eamonn Sheridan at www.forexlive.com.