China is gearing up for the start of a new trading link with Hong Kong, giving global investors access to onshore interest rate derivatives to further open up its capital market.
(Bloomberg) — China is gearing up for the start of a new trading link with Hong Kong, giving global investors access to onshore interest rate derivatives to further open up its capital market.
The People’s Bank of China shared draft rules for the Swap Connect to some Chinese financial institutions last month, according to people familiar with the matter. The proposal includes details such as a daily transaction limit, they said.
The authorities aim to roll out the trading link by the end of March, compared with an original target time-frame of within six months after a July announcement, according to the people who requested anonymity discussing private matters.
The rollout would reinforce Beijing’s claims that it’s pushing ahead with opening up its markets after three years of Covid-induced isolation. Offering a much-needed channel for risk hedging, the program also is expected to boost foreign investors’ demand for Chinese bonds following a year of record exodus.
The PBOC didn’t immediately respond to a request seeking comment.
“As envisaged at the time of the joint announcement in July last year, the preparatory work is expected to take six months or longer,” Hong Kong’s Securities and Futures Commission said in an emailed statement. “All parties have been working closely for the preparations, including system changes, cooperation arrangements and rules amendments.”
Modeled on existing programs that allow foreign investors to trade mainland stocks and bonds via Hong Kong, Swap Connect would include a daily limit of 20 billion yuan ($3 billion) for net interest rate swap transactions, said the people, citing the draft rules.
Interest rate swaps are the main hedging instrument for fixed income products in China’s domestic market.
Foreign investors have expanded their presence in the world’s second-biggest bond market exponentially in the past decade, thanks to a series of policy liberalizations by Beijing. Their total holdings in China’s interbank market, the main debt trading venue, reached 3.4 trillion yuan by the end of last year, nearly ten times the amount as of 2013 when Bloomberg started compiling relevant data.
However, the lack of access to onshore interest rate hedging tools such as swaps remains one of the major hurdles for global investors to further increase their exposure.
China introduced the so-called Bond Connect in 2017, a major step in its financial market liberalization, allowing overseas investors to build up holdings in the onshore debt market. Bloomberg LP, the parent company of Bloomberg News, provides services for the trading link.
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