One Year On: The Significance of China’s Swap Connect to Global Markets

The Swap Connect program offers investors access to China’s onshore Renminbi (RMB) interest rate swap market, providing exposure to the Chinese currency and interest rate movements. This enables investors to hedge RMB interest rate risk effectively and manage their exposure to China’s financial markets.

Zhaoting Xu, Deutsche Bank’s Head of Investment Bank for China, reflected on the program’s success as it marked its first anniversary in May. He highlighted that the launch of the northbound channel of the Swap Connect scheme last year has gained significant traction, leading to an increase in both market participants and trading volumes.

How does Swap Connect work?

Through partnerships with the China Foreign Exchange Trade System (CFETS), Shanghai Clearing House (SHCH), and the Hong Kong Stock Exchange (HKEX), Swap Connect offers a seamless trading and clearing experience for global investors. This allows investors to trade and clear onshore RMB interest rate swaps without altering their existing trading and settlement practices. By reducing operational complexity and costs, investors can easily access China’s onshore RMB interest rate swap market.

Initially, Northbound Trading has been implemented, enabling Hong Kong and foreign investors to engage in the Mainland derivatives market through mutual access for trading, clearing, and settlement processes.

According to Zhaoting, the scheme provides international investors with sufficient liquidity in the RMB interest rate swap market. “It provides an effective and timely channel to help overseas investors hedge their interest rate risks, and as a result, greatly increases their interest in investing in China’s interest rate market.”

Zhaoting noted that international investors appreciate the recent improvements made by financial regulators in mainland China and Hong Kong, including the introduction of a compression service to streamline portfolios and the clearing of backdated swap contracts. These enhancements are expected to reduce curve risks and costs effectively. Moreover, the introduction of interest rate swap contracts with payment cycles aligned with International Monetary Market dates will assist investors in mitigating fixing rate fluctuations.

What does the future look like for Swap Connect?

Zhaoting anticipates strong global interest in diversified interest rate hedging tools, such as trading treasury bond futures. China’s bond market is becoming more attractive to international investors, with increasing holdings and diversified portfolios. HKEX plans to launch offshore China treasury bond futures to meet this demand. A well-established onshore treasury bond futures market with sufficient liquidity may attract more global participation if opened to foreign investors.

Overall, Swap Connect offers a convenient and efficient way for investors to access China’s onshore RMB interest rate swap market, providing them with the tools they need to manage their risk exposure effectively.

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