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

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

Hong Kong at 25

Enoch Yiu

Published: 8:30am, 11 Jul 2022

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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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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.

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“For the next step forward, it would be good if China would allow international investors to trade the cross currency swap and also bond futures,” Tan said. “These derivatives markets will help investors have more risk management tools to manage their portfolios in the China bond market, and hence will attract more investment from overseas.”

More products for clients to trade and hedge their risks amid interest rate rises and geopolitical tensions were welcome, Tan said. “The US [Federal Reserve] is likely to continue increasing interest rates at a much faster pace than the last cycle to curb high inflation pressure,” he added.

The Fed rate will increase 1 percentage point in the third quarter, from 1.75 per cent now to 2.75 per cent at the end of September, and go up to 3 per cent by the end of the year, according to a Standard Chartered forecast.

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“The interest rate hike and other geopolitical factors have led to market volatility, which has increased the turnover of foreign currency and other interest rate and commodities products. As such, our first-half business momentum in the financial markets in Asia was better than expected,” Tan said.

“Looking ahead, the China market will continue to attract international investors. Despite the geopolitical tensions, international investors cannot ignore the second-largest economy in the world. A lot of fund houses and investors still continue to invest in China for the medium and long terms,” he said.

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