The over-the-counter market of interest rate swaps is an important part of how risks around rates can be hedged and managed. China and Hong Kong have built a number of such "connect" systems, part of how capital is being attracted into the region.

The China-Hong Kong Swap Connect scheme has launched, enabling international investors access to the mainland China interbank financial derivatives market to hedge the interest-rate risks of their RMB3.2 trillion ($460 billion) in Chinese bond holdings.

This new “connect” programme follows a number of such linkages between Hong Kong and mainland China in recent years. Already, a “wealth connect” programme joins together investors in these jurisdictions. China is trying to draw in more capital and boost the standing of the renminbi as a global currency. The move also helps Hong Kong to bolster its status as an important financial and wealth management hub. (See here for a related story about Hong Kong's moves to attract family offices, private equity, and other business.) 

Yesterday, Bloomberg, the financial data, news and business information company, said its Swap Connect solution has started to operate. 

Offshore investors that made trades over Bloomberg’s Swap Connect solution yesterday included a raft of firms such as Bank of China (Hong Kong), Bank of Communications Hong Kong Branch, China CITIC Bank International Limited, China Construction Bank (Asia) Corporation Limited, CICC International, Eastfort Asset Management Private Limited, Crédit Agricole Corporate & Investment Bank, HSBC and Standard Chartered Bank (Hong Kong) Limited, amongst others.

"With the development of the RMB markets, international investors have demonstrated their increasing interest in RMB assets and bonds and a growing need for risk management tools. Swap Connect marks another milestone in connecting the financial markets between the Chinese mainland and Hong Kong, providing offshore investors access to onshore derivatives markets and satisfying their needs for managing interest rate risks,” Xu Haifeng, deputy chief executive of Bank of China (Hong Kong), said. 

Luo Dongyuan, group vice president of Guotai Junan Securities, said: “This initiative enhances the attractiveness of RMB assets and is already generating interest within China and abroad.”

Among other banks commenting, Citibank (China) Co said it was one of the first batch of Northbound Swap Connect market makers and said it executed the first batch of northbound transactions with offshore investors.

The northbound Swap Connect provides offshore investors with a way to take part in the onshore RMB interest rate swap market. They can quote prices from onshore market makers through overseas e-trading platforms and execute transactions. 

The new "connect" will first begin with interest-rate swaps.