“The proposed enhancements are expected to support the development of onshore financial markets,” said Charles Lam, Citi’s head of markets for Hong Kong. “We anticipate an increase in transactions via Swap Connect and a deepening of liquidity.”
Zhaoting Xu, head of China investment banking at Deutsche Bank, described the Swap Connect mechanism as “the last important piece of the puzzle for overseas investors entering China.”
Good hedging tools like the interest-rate swap under Swap Connect will encourage international investors to hold more Chinese assets in the interbank market, Xu added during a media briefing in Beijing.
According to Deutsche Bank, interbank bond holdings by international investors in China rose to 4 trillion yuan in March from 3.21 trillion yuan a year ago.
Regulators’ data showed that as of last month, 20 mainland dealers and 58 overseas investors had conducted over 3,600 interest-rate swap transactions under the Swap Connect scheme. This resulted in an aggregate notional amount of around 1.77 trillion yuan and an average daily turnover of 7.6 billion yuan.
Tan Yueheng, chairman of Bank of Communications International Holdings and a member of Hong Kong’s Legislative Council, stated that as the northbound swap mechanism matures, the domestic bond market will develop more steadily with diversified international investments.
Swap Connect complements Bond Connect, launched in 2017 in Hong Kong to allow investors from mainland China and overseas to trade in each other’s bond markets.
John Thang, head of markets for Hong Kong, Greater China, and North Asia at Standard Chartered, believes that as international investors become more familiar with Swap Connect, it will promote the development of mainland China’s financial derivatives market and accelerate the pace of yuan internationalization.
More financial derivative products from China are expected to roll out to international investors, with bourse operator Hong Kong Exchanges and Clearing (HKEX) planning to launch China treasury bond futures to help investors manage interest rate and investment risks more effectively.
Market participants are eagerly anticipating waived fees and the use of interest rate swap contracts with payment cycles based on International Monetary Market (IMM) dates. The clearing houses for Swap Connect will extend an incentive program to fully exempt interest rate swap transaction fees and contract clearing fees for one year.