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Hong Kong’s Swap Connect hailed as ‘last important piece of the puzzle for overseas investors entering China’
- Launched a year ago, Swap Connect has helped global investors hedge US$553 billion in Chinese bond risk via interest-rate swaps
- Mechanism promotes mainland China’s financial derivatives market and accelerates yuan internationalisation, experts say
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The continuous opening up of China’s interbank financial derivatives market is expected to boost international investors’ confidence in the onshore bond market and further internationalise the yuan, according to industry experts.
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The Swap Connect mechanism, launched in Hong Kong one year ago, has supported global investors in hedging 4 trillion yuan (US$553 billion) in Chinese bond risk via interest-rate swaps.
Picking up on investors’ interests and suggestions, financial regulators in mainland China and Hong Kong on Monday introduced three enhancements that will expand the mechanism’s product scope, equip it with ancillary services like compression and clearing of backdated swap contracts, and reduce participation costs.
“The proposed enhancements will help further support the continued development of onshore financial markets,” said Charles Lam, Citi’s head of markets for Hong Kong. “As such, we would expect to see an increase in transactions via Swap Connect and a further deepening of liquidity.”
Zhaoting Xu, head of China investment banking at Deutsche Bank, said the Swap Connect mechanism is “the last important piece of the puzzle for overseas investors entering China”.
Good hedging tools such as the interest-rate swap under Swap Connect will help encourage international investors to hold more Chinese assets in the interbank market, he added during a media briefing in Beijing.
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