China, HK to launch rate ‘Swap Connect’ in boost to financial integration

HONG KONG (Reuters) -China and Hong Kong will launch a new “Swap Connect” scheme after six months, allowing mutual access to interest rate swaps trading to promote financial derivatives markets, and also upgraded a separate currency swap agreement.

The move, the latest effort to integrate China’s markets with those overseas, was announced on the same day China and Hong Kong launched ETF Connect and comes after similar ‘connect’ schemes facilitating cross-border stock and bond investments.

“Swap Connect is another major milestone in deepening connectivity between mainland China and international markets,” Nicolas Aguzin, chief executive of the Hong Kong Exchange and Clearing Limited (HKEX), said on Monday.

“Just as Stock Connect and Bond Connect have changed the DNA of equity and fixed-income markets, Swap Connect will do the same for the interbank derivatives market.”

The scheme will support the further development of China’s capital markets, and give international investors an accessible and convenient way to manage their China exposure, he added.

The People’s Bank of China also said on Monday in a separate statement that it has upgraded a currency swap facility with Hong Kong to a permanent agreement – its first standing swap agreement – and expanded the size to 800 billion yuan ($119.40 billion) from 500 billion yuan.

Northbound Swap Connect trading, which allows overseas investors to participate in China’s interbank financial derivatives market, will begin first, Chinese and Hong Kong financial regulators said in a joint statement.

Southbound trading, which allows mainland investors to access the Hong Kong financial derivatives market, will be explored in due course.

The scheme, launched days after the 25th anniversary of the handover of Hong Kong to Chinese rule, “is another important measure of the central government to support the development of Hong Kong and enhance mainland-Hong Kong cooperation,” according to the statement.

“It is conducive to the consolidation and enhancement of Hong Kong’s status as an international financial centre”.

Initially, interest rate swaps will be eligible under the scheme, with other products to be included in due course depending on market conditions, the statement said.

“The official launch of Swap Connect will take place after six months from the date of this announcement,” it added.

The statement was jointly published by the People’s Bank of China, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority.

(Reporting by Alun John and Selena Li in Hong Kong and Samuel Shen in Shanghai; Editing by Kim Coghill and Jacqueline Wong)