Hong Kong gets a shot in the arm as China’s offshore financial hub with new products and deeper yuan pool in expanded Connect scheme

Hong Kong and China will develop a Swap Connect programme for bonds this year, after formally kicked off the ETF Connect programme

The PBOC upgraded Hong Kong’s yuan settlement programme into a permanent arrangement and increased the allocation by 60 per cent to 800 billion yuan

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Helicopters flew China’s national flag and the Hong Kong Special Administrative Region’s standard over Central district to mark the 25th anniversary of Hong Kong’s handover to Chinese rule on 1 July 2022. Photo: Nora Tam.

Georgina Lee,Mia CastagnoneandIris Ouyang

Published: 6:00pm, 4 Jul 2022

Hong Kong widened its cross-border investment channel with Shanghai and Shenzhen with two new classes of financial products on Monday, elevating the city’s status as mainland China’s offshore capital hub.

The ETF Connect formally kicked off, allowing global investors to tap 83 exchange-traded funds (ETFs) in China – 53 in Shanghai, 30 in Shenzhen – via accounts held in Hong Kong, an opening that may attract up to 200 billion yuan (US$29.8 billion) of investments within one to two years, according to a forecast by China Asset Management.

Separately, the monetary authorities of China and Hong Kong said they would establish a Swap Connect for global investors to hedge the risks of 3.7 trillion yuan of offshore bonds held by them. The swap will debut at the end of 2022 at the earliest, with interest rate swaps for users to exchang one stream of future interest payments for another, according to a joint statement by the financial and monetary regulators of China and Hong Kong.

The expansion of the Connect scheme, hot on the heels of the 25th anniversary of Hong Kong’s return to Chinese sovereignty three days earlier, is one of the clearest signs of the city’s indispensable role as China’s offshore financial hub. Hong Kong is the crucial stepping stone for Chinese companies and investors to tap overseas funds, and provides a gateway for global capital to get into China, the world’s second-largest economy and capital market.

John Lee Ka-chiu spoke during his swearing-in ceremony as Hong Kong’s Chief Executive on July 1, 2022. Photo: Bloomberg

“The world is going through seismic changes unseen in a century, but times is on our side, and this is the foundation for our perseverance, determination and confidence,” Hong Kong’s Chief Executive John Lee Ka-chiu said during an online seminar to mark the fifth anniversary of the Bond Connect programme. “In the progress of [Hong Kong’s development] into an international financial centre, we [witnessed] the fact that China’s steady development is the most solid support [for] Hong Kong.”