Swap Connect poised to attract foreign investment

China has taken another significant step forward in financial market opening-up as the newly announced Swap Connect is poised to facilitate overseas investors' risk management in the onshore bond market and attract more foreign investment, officials and experts said on Monday.

The new connection mechanism between the Chinese mainland and Hong Kong will also help strengthen the latter's status as an international financial hub and accelerate the development of the onshore interest rate derivatives market, they added.

Financial regulators in the mainland and Hong Kong jointly unveiled the Swap Connect on Monday, which will facilitate offshore investors' interest rate derivatives transactions with investors in the mainland and will take effect six months later.

The move came in response to offshore investors' growing demand to access the onshore derivatives market to manage the interest rate risks associated with their rising investments in the mainland bond market.

Official data showed offshore investors' holdings in Chinese bonds have seen an annual average increase of 40 percent to approximately 3.7 trillion yuan ($552.78 billion) since the launch of the Bond Connect in 2017, which facilitates investors from the mainland and overseas to trade in each other's bond markets.

Pan Gongsheng, vice-governor of the People's Bank of China, the nation's central bank, said the Swap Connect will assist investors in managing interest rate risks and strengthen the connectivity between the mainland and Hong Kong financial markets.

It can also consolidate Hong Kong's pivotal role in offshore renminbi transactions, Pan said, reflecting the central government's emphasis on elevating Hong Kong's status as an international financial hub.

"The Swap Connect will mark another significant milestone in China's continuous bond market opening-up," said Wesley Yang, deputy CEO and head of financial markets at Standard Chartered China.

The connect will provide a convenient mechanism for global investors to hedge interest rate risks when allocating renminbi-denominated assets, Yang said.

In its initial development stage, derivatives eligible for the connect will be interest rate swaps. At an appropriate time, regulators will make more types of derivatives available and will also consider facilitating mainland-based investors' participation in Hong Kong's derivatives market via the connect.

"While swaps function primarily as an instrument for risk management and portfolio diversification, this initiative opens significant new possibilities for a variety of derivatives that will unleash more foreign participation in China's bond market," said Li Bing, head of Asia Pacific at Bloomberg.

The connect also creates an opportunity for onshore market makers to improve their services and will help strengthen Hong Kong's unique position as the international gateway to onshore markets, Li added.

In a move to deepen cooperation between mainland and Hong Kong markets, the PBOC and the Hong Kong Monetary Authority announced on Monday that they have upgraded their currency swap agreement.

The agreement has become a long-standing one with no need for renewal and has seen an expansion in size from 500 billion yuan to 800 billion yuan, marking the first time for the PBOC to sign a long-standing currency swap agreement.

Jiang Xueqing contributed to this story.