The northbound trading link of the Swap Connect between the Chinese mainland and the Hong Kong Special Administrative Region will commence on May 15, with the initial eligible products including interest rate swap contracts and the yuan being used for conducting financial activities.
Experts said the launch will be a milestone in China's continued financial opening-up, with more inflows of overseas capital while the internationalization and attractiveness of the yuan and yuan-denominated assets rise.
The Swap Connect will begin with northbound trading, allowing overseas investors from Hong Kong and other countries and regions to participate in the mainland interbank financial derivatives market through a connection between financial infrastructure institutions in the two markets, according to a statement by the Hong Kong Monetary Authority (HKMA) on Friday.
At the initial stage, eligible products will include interest rate swap contracts. The quotation, transaction and settlement currency will be in yuan.
China's financial opening-up previously did not include derivatives trading, so the start of the northbound trading link marks a significant milestone of the nation's official opening in financial derivatives, Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Monday.
An agreement on jointly developing Swap Connect, the mutual market access program between the Chinese mainland and Hong Kong in the interbank interest rate swap markets, was announced on July 4, 2022 by the People's Bank of China (PBC), the Hong Kong Securities and Futures Commission and the HKMA, read the HKMA's statement.
Industry observers anticipate more global investment to flow into China as the nation's bond market further converges with the international market. This trend will help investors optimize their asset allocation and diversify the investor structure of the Chinese bond market.
China remains the world's second-largest bond market. As of the end of March, overseas institutions had 3.3 trillion yuan ($477.1 billion) in custody balances in the country's bond market, accounting for 2.2 percent of the total, PBC data showed.
International investors and institutions will have a richer product selection and more opportunities to participate in the financial activities in the Chinese mainland, Xi added, which will encourage overseas investors to hold more yuan.
Speaking at the launch, Xi noted that global capital is able to better hedge risks, reduce costs and gain returns by holding yuan and enter the mainland market through Hong Kong, as interest rate swap will be conducted through yuan.
The value of the yuan is relatively stable, reducing overseas investors' exchange rate exposure, the State Administration of Foreign Exchange's deputy administrator and spokesperson Wang Chunying said in April, and yuan assets can better meet the allocation needs of overseas investors.
In 2017, the Bond Connect linking the bond markets between the mainland and Hong Kong officially started operation. Its stable and efficient operation has injected new vitality and energy to deepen the reform and opening-up of China's financial market.
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