China’s Repo Market Sees Growth Despite Legal Barriers and Low Yields

China's initiative to facilitate borrowing against domestic bond holdings for international investors is gaining momentum, even as legal complexities and low returns temper wider engagement. Offshore institutions' monthly repurchase agreements, commonly called repos, surged to 1.2 trillion yuan in August 2026, more than doubling the 573 billion yuan recorded in August 2025, according to data from China Central Depository & Clearing Co (CCDC).

This upward trend follows regulatory changes introduced in September 2025, which granted broader foreign investor access to repos. These agreements allow investors to raise short-term onshore yuan by selling bonds with a commitment to repurchase them later. Charles Lam, Citigroup’s head of markets in Hong Kong, remarked, "Investors can now deploy Chinese government bonds to meet liquidity needs. That has materially improved the efficiency and attractiveness of the market."

Despite this growth, foreign participation in China's repo market remains limited relative to the overall volume. Foreign investors hold roughly 2% of China's onshore bonds, yet their repo transactions accounted for only 1.2% of total market activity last month, based on Bloomberg calculations using CCDC data. This indicates a cautious, incremental opening of China's domestic markets.

Beijing continues to promote channels like the China Interbank Bond Market Direct and Bond Connect, designed to ease offshore investors' trading and borrowing against domestic bond holdings. However, adoption is constrained by unresolved legal issues and the relatively low yields of Chinese bonds compared to global alternatives.

In 2025, regulators updated rules allowing foreign investors to select between the Global Master Repurchase Agreement (GMRA) governed by English law, or local agreements issued by the National Association of Financial Market Institutional Investors under Chinese law. These contracts establish the legal framework for repo deals, specifying risk management and default procedures.

John Luk of Crédit Agricole CIB highlighted ongoing challenges around aligning contract preferences, close-out netting, bankruptcy risks, and operational standards. Negotiating GMRA agreements typically requires three to six months, slowing market expansion. Priscilla Chen, senior consultant at Ashurst Perkins Coie, noted that most clients interested in repo transactions last year were Chinese financial institutions in Hong Kong seeking GMRA relationships to increase trading options with offshore investors.

Growth in foreign repo transactions has largely come from outright repos, where bond ownership transfers to the buyer, unlike traditional pledged repos where bonds remain in the seller’s account. Outright repos made up 23% of foreign settlement volumes in August 2026, rising sharply from about 4% in the previous year, Bloomberg data shows. Becky Liu from Standard Chartered Bank attributed this to increased activity by foreign private sector investors in China’s onshore repo market.

Still, China's low interest rate environment poses a significant obstacle. While borrowing yuan cheaply is appealing, the yield spread between Chinese sovereign bonds and US Treasuries is at a record high, leaving Chinese debt offering limited returns compared to global peers. Kimi Liu of Clifford Chance He Ping Joint Operation Office explained that this macroeconomic context dampens international interest in Chinese debt.

Regulators are responding with initiatives to boost the utility of Chinese government bonds, including efforts to promote their acceptance as collateral. Kimi Liu added that expanding collateral options aims to enhance the attractiveness of these bonds to global investors.

Looking ahead, market participants anticipate further integration of financial products and a broader role for Hong Kong as an offshore yuan center. Cheuk Wong from HSBC emphasized that combining repo, foreign exchange, and hedging tools will help foreign investors deploy balance sheets more efficiently across borders, supporting deeper participation in China’s onshore bond markets.

China's gradual opening of its bond market reflects a wider global trend of increasing cross-border financial integration, even as legal and economic challenges persist. The developments in repo trading signal progress toward greater liquidity and accessibility for foreign investors, reinforcing China's position in the global bond landscape.