Northbound Swap Connect: China opens derivatives market to global investors via Hong Kong for the first time

Scheme allows investors to hedge the interest-rate risks of their 3.2 trillion yuan (US$460 billion) in Chinese bond holdings

27 international traders completed interest rate swap contracts worth 8.26 billion yuan in the ‘northbound trade’ of the scheme on the first day

Reading Time:4 minutes

Left to right: Paul Chan Mo-po, Financial Secretary; Nicolas Aguzin, CEO of HKEX; John LEE Ka-chiu, Chief Executive of the Hong Kong SAR; Yin Zonghua; Christopher Hui, Secretary for Financial Services and the Treasury; Eddie Yue Wai-man, CEO of Hong Kong Monetary Authority; Hugo Leung, independent non-executive director of HKEX; and Glenda So, co-head of markets at HKEX mark the launch of the northbound Swap Connect on May 15, 2023 in Hong Kong. Photo: Elson Li

Published: 10:02am, 15 May 2023Updated: 7:17pm, 15 May 2023

The much anticipated Swap Connect scheme launched in Hong Kong on Monday, giving global investors their first access to the mainland China interbank financial derivatives market to hedge the interest-rate risks of their 3.2 trillion yuan (US$460 billion) 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 programmes launched in stocks, bonds, exchange-traded funds and wealth-management products over the past nine years.

At the close of trading on the first day, 27 international traders completed interest rate swap contracts worth 8.26 billion yuan in the “northbound 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 centre and as a risk-management centre,” Hong Kong’s Chief Executive John Lee Ka-chiu said during a launch ceremony at the Connect Hall in Central, which was the former trading hall of the stock exchange.

Hong Kong’s Chief Executive John Lee Ka-chiu spoke at a ceremony to kick off the Swap Connect at the Hong Kong stock exchange on May 15, 2023. Photo: Elson Li

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 20 billion yuan.