Chinese banks lent a net $86.5 billion to counterparties on the repo market in April, against mostly local currency bonds as collateral. That was up from $70 billion in March and $2.1 billion in April 2020, People's Bank of China (PBOC) data showed.

The surge in the use of FX repos comes after regulators allowed and expanded the use of yuan bonds as cross-currency collateral, ANZ economists Zhaopeng Xing and Raymond Yeung said.

The implementation of a settlement facility last June had also boosted trades, the ANZ economists added in a note.

Surging export receipts and investment flows helped lift the value of foreign cash deposits above $1 trillion for the first time in April, with China's banks struggling to lend it out and posing a risk to official efforts to control a fast-rising yuan.

In late May, the PBOC moved to tighten onshore dollar liquidity, directing financial institutions to hold more foreign exchange in reserve.

As banks on the mainland struggle to deploy those dollar deposits, the collateralised dollars for yuan bonds repos allow foreign investors access to cheap foreign currency loans, while making such lending more secure for local banks.

The spike in repos indicated the dollars building up on bank balance sheets were portfolio flows, rather than any effort by the PBOC to intervene in yuan markets, Xing and Yeung said, while noting the rise in foreign bond holdings.

Foreign investors held a record 3.68 trillion yuan ($575 billion) in Chinese yuan bonds at the end of May, including more than 10% of outstanding Chinese government bonds.

(Reporting by Andrew Galbraith; Editing by Vidya Ranganathan and Alexander Smith)