China’s central bank is expanding its capital markets by allowing more onshore investors to buy offshore bonds. The People’s Bank of China is broadening the Bond Connect program to include more local institutions, such as brokers, mutual funds, wealth managers, and insurers. The central bank also plans to increase the quota for the Swap Connect scheme, which will give investors more options for hedging and interest rate swaps. Reports indicate that the authorities may double the Southbound Bond Connect program’s quota to USD 139 billion.

Enhancing Global Role

These actions aim to relax capital controls and encourage two-way access to markets. This aligns with Beijing’s goal to boost the global significance of the yuan and diversify investment opportunities for domestic institutions. The update from the People’s Bank is a clear effort to open more channels for cross-border capital flow, especially in fixed income markets. By expanding Bond Connect to include more onshore participants, such as wealth managers and insurers, the central bank is encouraging domestic capital to invest abroad. This kind of move typically requires strong regulatory backing, highlighting the importance of this decision. At the same time, increasing the quota for the Southbound Bond Connect shows a strong intent to foster outbound portfolio diversification. Previous limits restricted offshore investment activity; raising this cap to approximately $139 billion removes a significant barrier, especially for institutions managing substantial fixed income assets. We can expect a noticeable increase in demand for foreign currency bonds, particularly those with a slight yield premium.

Access to Swap Markets

On the derivatives side, the raised limits under the Swap Connect scheme are significant. This change allows Chinese financial institutions to engage more freely with international interest rate markets. For those tracking yield curve strategies, this access enables better duration management and new opportunities for risk-adjusted returns that weren’t possible before. For traders, this development is very important. We anticipate initial inflows into bond maturities that align with target duration ranges in key developed markets. If the exchange rate remains moderately managed and policy rates vary across regions, there will be further opportunities for convergence trades between currencies and rates. Hedging will also become more dynamic. With domestic funds showing greater interest in foreign exposure, this expansion will lead to more activity in interest rate swaps linked to foreign bonds. This amounts to a feedback loop affecting pricing on both sides. There may be temporary volatility around announcements and macro policy signals, but this reflects deeper market participation, not mispricing. Liu’s comments last week already provided momentum for this trend. Regulatory approvals will likely follow market demand, making it crucial to monitor the uptake of allocated quotas instead of waiting for new announcements from the central bank. Position your strategies accordingly. We also expect tighter Treasury-OIS spreads on days when Connect volumes increase, especially during periods of syndicated issuance. This type of friction can create tradeable opportunities, especially for those agile enough to adjust margin thresholds quickly and access overnight liquidity when possible. In the upcoming sessions, pay more attention to the yuan’s relative value compared to basket-weighted indices. This pricing will be more important than simple pairwise FX rates because hedging costs will depend on how new flows are affecting the market. Not all pairs will respond in the same way, and there will be points of saturation as domestic accounts concentrate on perceived safe jurisdictions. An adjustment is happening, and it’s measurable. Watch turnover figures for longer-term interest rate swaps; they have already started to rise along with these announcements. We should adjust our curve dynamics now that institutional participation is increasing. Create your live VT Markets account and start trading now.

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