Swap Connect with Hong Kong will help China attract more international investors to its bond markets, Standard Chartered banker says

Name: Roadblocks, heightened security as Chinese president visits Hong Kong for 25th handover anniversary
Uploaded: 2022-07-11T00:30:11.000Z
Duration: 4 min 35 s
Description: Roadblocks, heightened security as Chinese president visits Hong Kong for 25th handover anniversary

International investors will find the new Swap Connect useful, as it ‘helps them hedge their interest rate risk exposure’, says John Tan, bank’s head of financial markets in Asia

As a next step, China should allow international investors to trade the cross currency swap and bond futures

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The Swap Connect as well as the ETF Connect are being viewed as Beijing’s commitment to maintaining and expanding Hong Kong’s role as a connector between China and the world, according to analysts. Photo: AP

Enoch Yiu

Published: 8:30am, 11 Jul 2022

The newly announced Swap Connect will help China attract more international investors to its bond markets, according to a senior Standard Chartered banker.

“International investors who trade in the mainland [China] bond market will find the new Swap Connect useful, as that helps them hedge their interest rate risk exposure,” said John Tan, head of financial markets in Asia at Standard Chartered, one of the city’s three note-issuing lenders.

The monetary authorities of China and Hong Kong will establish the Swap Connect for global investors to hedge risks linked to 3.7 trillion yuan (US$552 billion) worth of Chinese bonds held by them, the authorities said on July 4. The mechanism will debut at the end of 2022 at the earliest, with interest rate swaps for users to exchange one stream of future interest payments for another, according to a joint statement by the financial and monetary regulators of China and Hong Kong.

In the five years since the establishment of the northbound Bond Connect in 2017, international investors have increased their holdings of yuan onshore bonds by 40 per cent a year to 3.7 trillion yuan, Pan Gongsheng, the People’s Bank of China (PBOC)’s deputy governor, said at a summit on July 4.

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Roadblocks, heightened security as Chinese president visits Hong Kong for 25th handover anniversary

The Swap Connect was announced on the same day as the formal launch of the ETF Connect, which allows global investors to tap 83 exchange-traded funds (ETFs) in China – 53 in Shanghai, 30 in Shenzhen – through accounts held in Hong Kong. The ETF Connect might attract up to 200 billion yuan in investments within a year or two, according to a forecast by China Asset Management.

The two new cross-border trading schemes came as Hong Kong celebrated the 25th anniversary of its return to Chinese rule on July 1. They reflect Beijing’s commitment to maintaining and expanding Hong Kong’s role as a connector between China and the world, analysts said.