The much anticipated Swap Connect scheme was launched in Hong Kong on May 15, giving global investors their first access to mainland China's interbank financial derivatives market to hedge the interest-rate risks of their CNY3.2 trillion in Chinese bond holdings. The new scheme marks another milestone in the gradual opening up of mainland China’s capital markets, following a range of connect programs launched in stocks, bonds, exchange-traded funds and wealth-management products over the past nine years. Within just a few minutes of the launch, traders completed 37 transactions worth CNY1.8 billion in contracts in the “north-bound trade” of the scheme, which allows international and Hong Kong investors to trade in the mainland interbank financial derivatives market.
“The new scheme will strengthen Hong Kong’s role as an offshore yuan trading and risk-management center,” Hong Kong’s Chief Executive John Lee said during the launch ceremony at the Connect Hall in Central, the former trading hall of the stock exchange. Swap Connect will first debut with interest-rate swaps, which are over-the-counter, bilateral contracts that allow holders of a bond to manage their risks by swapping one stream of future interest payments for another, based on a specified principal amount. At the initial stage, the daily trading quota of Swap Connect is set at CNY20 billion. The introduction of Swap Connect comes at a time when more overseas investors are participating in the onshore cash bond market, and their demands for risk-management tools for yuan interest rates are also soaring.
A total of 1,082 international institutional investors traded CNY37 billion worth of mainland bonds on average per day in the first quarter of this year, 9% higher than the same period last year, according to Hong Kong Exchanges and Clearing (HKEX). International investors held a combined CNY3.21 trillion of onshore bonds as of the end of March, accounting for 2.5% of all such bonds, according to the People’s Bank of China (PBOC).
“Swap Connect adds to the ecosystem of renminbi assets in that it offers international investors the use of offshore renminbi to invest in the onshore interest-rate swap market,” Nicolas Aguzin, Chief Executive of HKEX, said at the launch ceremony. “Hong Kong is the international financial center that is uniquely positioned to lead the advancement of the renminbi internationalization and swap Connect is a very important component of that drive going forward,” Aguzin added, as reported by the South China Morning Post.
The timetable for the south-bound leg of the scheme, which will enable mainland investors to access the Hong Kong financial derivatives market, has not been announced yet. The Bond Connect scheme, which was launched in July 2017, also debuted only with a north-bound leg initially before a south-bound leg was added in 2021. The first Connect scheme started in 2014, linking the stock markets of Hong Kong and Shanghai for cross-border trading, before the Shenzhen leg was added two years later.
