Financial analysts predict that Swap Connect enhancements by Chinese mainland and Hong Kong financial regulators will boost the domestic bond market and consolidate Hong Kong’s status as an offshore renminbi center.

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On Monday, the government of Hong Kong Special Administrative Region welcomed new measures by the People’s Bank of China, the Securities and Futures Commission and the Hong Kong Monetary Authority to enhance the mutual access arrangements between the mainland and Hong Kong interest rate swap markets (Swap Connect).

Launched in May 2023, Swap Connect is a derivatives market access scheme that allows Hong Kong and overseas investors to trade and clear onshore renminbi-denominated interest rate swaps through mutual access in respect of trading, clearing and settlement

“It represents a continued drive to promote international participation in the mainland’s bond market, where investors need the ability to hedge interest rate risk, foreign exchange risk and credit risk. We look forward to more developments around credit risk hedging for mainland bonds, as well as the use of such bonds for financing purposes. These are exciting times for the world’s second largest bond market,” Clifford Chance Hong Kong Partner Terry Yang told China Daily.

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The enhancement measures include enriching product types and aligning with mainstream products traded globally, and rolling out other system enhancements and incentive programs to reduce the participation costs of mainland and overseas investors, thereby further addressing the diverse risk management needs of domestic and foreign investors as well as promoting trading of mainland bonds.

Mainland and Hong Kong regulators will guide the financial market infrastructure institutions to continue to promote business collaboration under Swap Connect in a steady and orderly manner, and improve the various operational arrangements.

Tan Yueheng, the lawmaker representing the Election Committee constituency, said he expected the optimization will facilitate more foreign investor participation in the renminbi offshore market and help enhance Hong Kong’s financial competitiveness.

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“As the northbound swap mechanism continues to mature, it is believed that the domestic bond market will develop more steadily and internationally with the participation of diversified international investments,” Tan said.

Tan, who is also the chairman of BOCOM International Holdings Company, argued that through the enhancements, foreign investors can learn more about the mainland’s monetary policy and economic conditions that will help them participate more in the renminbi offshore market, thus further consolidating Hong Kong’s status as an offshore renminbi center.

According to government data, as of April this year, the average daily turnover calculated on a monthly basis had nearly tripled from the first month of its launch to over 12 billion yuan ($1.66 billion) in notional amount

Launched in May 2023, Swap Connect is a derivatives market access scheme that allows Hong Kong and overseas investors to trade and clear onshore renminbi-denominated interest rate swaps through mutual access in respect of trading, clearing and settlement.

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The latest refinements constitute the second batch of enhancements publicized within a month following the China Securities Regulatory Commission’s announcement of the five measures to support the expansion of mutual access between the capital markets of the two places.

According to government data, as of April this year, the average daily turnover calculated on a monthly basis had nearly tripled from the first month of its launch to over 12 billion yuan ($1.66 billion) in notional amount. Twenty mainland dealers and 58 overseas investors conducted more than 3,600 interest rate swap transactions with an aggregate notional amount of approximately 1.77 trillion yuan, representing an average daily turnover of 7.6 billion yuan in notional amount.

HKMA Chief Executive Eddie Yue Wai-man said as the mainland economy is slowly recovering, investor sentiment toward mainland financial assets has improved. “The Northbound Stock Connect has recorded net fund inflows in the past three months, reversing net fund outflows last year. The Northbound Bond Connect has always recorded net fund inflows,” he highlighted at the Legislative Council Financial Affairs Panel meeting last week.