China Central Bank Asks Domestic Banks to Regulate Outward Investments by Bond Connect Scheme

Based on two sources with direct knowledge of the matter, China's central bank has asked some domestic banks to reduce their outward investments through the Bond Connect scheme, adding to a slew of recent measures aimed at supporting the Chinese yuan.

According to the sources, the People's Bank of China (PBOC) window guidance appears to be aimed at containing yuan flows into Hong Kong and limiting yuan supply in offshore markets.

It is the latest in a series of recent efforts to stabilise the yuan, which comes as China's financial markets suffer losses and heavy outflows.

The guidance "could reduce mainland capital flowing out through the bond market," said Ken Cheung, chief Asian FX strategist at Mizuho Bank. "And it could also drive offshore yuan yields higher to support the renminbi."

The southbound leg of the two-year-old Bond Connect scheme allows mainland institutional investors to purchase bonds traded in Hong Kong.

"Restricting yuan from flowing to offshore market could tighten offshore yuan liquidity to raise the financing cost," said one of the sources, who reckons the central bank's move is a strike against foreign yuan bears.