Beijing announces interest rate swaps with Hong Kong after Xi Jinping visit

International investors will be able to tap China’s $3.1tn swaps market for the first time through a link with Hong Kong announced on Monday, as Beijing intensifies its efforts to modernise its domestic capital markets.

The arrangement, which was announced on the same day as an expanded currency swap between China’s central bank and Hong Kong’s monetary authority, followed the 25th anniversary of the territory’s return from Britain and a rare visit from Chinese president Xi Jinping.

The project builds on Xi’s promise of support for Hong Kong to “maintain its unique position and advantages”, and to bolster its status as “an international financial and trading hub”.

Authorities in China have been encouraging the largest the development of a bigger and more efficient derivatives market as its own domestic economy becomes the second in the world.

However it has a small swaps market relative to the size of its gross domestic product. Last year it traded an outstanding notional value of Rmb21.1tn ($3.14tn), according to the central bank. That compares with nearly $600tn for the global over-the-counter derivatives market, where deals are mainly negotiated between banks.

Last year China passed specific laws for futures and swaps trading that gave investors stronger legal protections on netting — a crucial part of the global market because it allows users to offset different positions and saves them millions of dollars a day of insurance to support their deals. The move, which comes into effect later this year, was warmly welcomed by Isda, the global derivatives trade group.

The new arrangement, called “swap connect”, will allow offshore investors in Hong Kong to trade and clear swaps through Hong Kong Exchanges and Clearing, according to a joint statement from the People’s Bank of China, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission.

Trading that allows Chinese investors to access Hong Kong’s derivatives market, will be explored “in due course”, it added.

As part of the venture the parties are building a link to the Shanghai Clearing House through CFETS, the China’s official interbank market trading platform. HKEX said it would take about six months to complete. A clearing house manages the credit risk on a derivatives deal and prevents the effects of a default from spreading through the market.

“Swap connect is another major milestone in deepening connectivity between mainland China and international markets,” said Nicolas Aguzin, chief executive of Hong Kong Exchanges and Clearing.

The move extends the links between the Hong Kong and Shanghai exchanges following the launch of connected stock and bond ventures in the past decade.

Also on Monday, the PBoC said it had upgraded a currency swap with the HKMA, expanding its size to Rmb800bn from Rmb500bn. It is the first standing swap agreement signed by the central bank that allows money swaps to be rolled over more easily without termed renewals of agreements, said the PBoC.

In a similar connectivity arrangement, investors in China and Hong Kong started trading exchange traded funds in each other’s markets on Monday.

Additional reporting by Chan Ho-him in Hong Kong

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