CHINA’S central bank is considering widening access to the country’s onshore interbank bond market through a program modeled on the Shanghai-Hong Kong stock connect program, two sources with direct knowledge of the matter said.

    The Shanghai-Hong Kong stock connect, which was launched in 2014, allows limited two-way capital flows between the bourses and foreign investors have hoped that the program would be widened to include access to China’s onshore bond market.

    The People’s Bank of China could be preparing for just such a move.

    Expanding access to the onshore bond market would help maintain overall market liquidity in the yuan and bolster China’s case for the currency to be included in the International Monetary Fund’s currency basket.

    Given the very large size of the onshore market and investor caution following China’s recent equity meltdown, analysts view any aggregate price impact as limited, at least in the short run.

    “I don’t expect that fund flows would be large enough to really move prices in the overall market,” said Fances Cheung, head of Rates Strategy Asia Ex-Japan at Societe Generale in Hong Kong.

    “Nonetheless more foreign involvement could help with price discovery for some fixed income products.”

    In mid July, the central bank announced that foreign central banks, sovereign wealth funds and some other institutional investors would be allowed to invest directly in the interbank market subject to filing their investment plan with the People’s Bank of China.

    A Hong Kong connect-style program could, in theory, allow for much larger unrestricted capital flows.

    Until recently, foreign investors have only been able to access China’s onshore bond markets through the quota-based Qualified Foreign Institutional Investor (QFII) and Renminbi QFII programs, which are relatively small in scale and entail cumbersome approval and transaction processes. (SD-Agencies)