China asks banks to limit some Connect bond outflows – sources

SHANGHAI/BEIJING  – China’s central bank has asked some domestic banks to scale back their outward investments through the Bond Connect scheme, two sources with direct knowledge of the matter said.

The window guidance from the People’s Bank of China (PBOC)seems to be aimed at containing yuan outflows into Hong Kong, and thus ensuring less supply of yuan in offshore markets, the sources said.

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.

Both sources spoke on condition of anonymity as they were not authorized to talk to the media.

The PBOC declined to comment on the content of the window guidance.

The directive is the latest in a volley of measures China has taken to defend a currency that’s been beaten down by a weak economy and capital outflows. Several measures in the past week have been aimed at raising the cost of shorting the yuan offshore.