Foreign investors gain new collateral options for China bond trades in January

Foreign investors can pledge their holdings of China government bonds and policy bank bonds as collateral for Northbound Swap Connect trades beginning on January 13 in a move that enhances their capital efficiency and promotes yuan internationalisation, bourse operator Hong Kong Exchanges and Clearing (HKEX) said on Monday.

HKEX’s clearing subsidiary, OTC Clearing Hong Kong, will allow the new forms of collateral to cover initial margin requirements in the connect scheme, which allows global investors to access mainland China’s interbank financial derivatives market to hedge interest-rate risks. That is an expansion from the current list of collateral, which is mostly cash and certain offshore securities.

The move “provides greater flexibility to international investors and [enhances] their capital efficiency”, HKEX said in a statement. “It will also help vitalise international investors’ bond holdings in the China Interbank Bond Market, promoting the internationalisation of the [yuan].”

Overseas investors’ holdings of onshore Chinese bonds reached 4.15 trillion yuan (US$570 billion) in November, marking the eighth consecutive month that the tally stayed above 4 trillion yuan despite a recent retreat due to a weaker yuan against the US dollar and tumbling long-term yields. Over half of their holdings were Chinese government bonds, followed by 23.6 per cent negotiable certificates of deposit and 21.7 per cent policy financial bonds, according to official data.

Swap Connect, launched in Hong Kong in May 2023, has supported global investors in hedging their Chinese bond risk via interest-rate swaps. Such derivative products are over-the-counter, bilateral contracts that allow bondholders to manage their risks by swapping one stream of future interest payments for another based on a specified principal amount.