China’s effort to help global investors borrow against their 3.2 trillion yuan ($477 billion) in domestic bond holdings is gaining traction, even as legal friction and low yields limit broader participation. Monthly repurchase agreements, or repos, by offshore institutions reached 1.2 trillion yuan in August, more than double the 573 billion yuan recorded a year earlier, according to data from China Central Depository & Clearing Co. The surge follows a decision last September to grant more foreign investors access to the tool, which lets them raise short-term onshore yuan by selling bonds with an agreement to buy them back later.

“Investors can now deploy Chinese government bonds to meet liquidity needs,” said Charles Lam, head of markets for Citigroup Inc. in Hong Kong. “That has materially improved the efficiency and attractiveness of the market.” Yet, despite the recent surge, foreign activity in China’s repo market remains a tiny fraction of overall turnover. Overseas institutions own about 2% of China’s onshore bonds, but their repo trades accounted for just 1.2% of total market volume last month, according to Bloomberg calculations based on CCDC data.

Beijing remains eager to expand foreign access through channels like China Interbank Bond Market Direct and Bond Connect, which allow offshore investors to trade and borrow against onshore holdings. However, broader participation continues to be constrained by legal hurdles and low bond yields. Regulators updated rules last year to let foreign investors choose between global standard contracts — Global Master Repurchase Agreement under English law or local agreements issued by the National Association of Financial Market Institutional Investors under Chinese law — to govern onshore repo deals.

Growth among foreign investors has been driven mainly by outright repos, where ownership of the bond is transferred to the buyer rather than frozen in the seller’s account as in a traditional pledged repo. Outright repos accounted for 23% of foreign settlement volumes in August, up from about 4% a year earlier, according to Bloomberg calculations based on CCDC data.

“The substantial rise of outright repo transactions is driven by rising foreign private sector investors’ transactions in China’s onshore repo market,” said Becky Liu, head of Greater China strategy at Standard Chartered Bank. Beyond documentation, China’s low interest rate environment remains a primary headwind. While cheap yuan borrowing costs are appealing, a record yield gap between benchmark Chinese sovereign bonds and US Treasuries leaves onshore debt with little return relative to global peers.