2023-05-15 13:17:08
Chinese central
China’s economy
China’s sovereign bond market has been rising for regarding 7 consecutive weeks
China will allow global investors, who are awaiting the reopening of the Chinese economy, to invest directly in a new strategic instrument, starting today, Monday, whose market size exceeds several trillion dollars.
The internal interest rate swaps, which had an annual turnover of $3 trillion last year, and which trade via what is known as the “Swap Connect” program between mainland China and Hong Kong, will be available to offshore funds with easy access to derivatives that will help hedge their exposure to the second largest bond market. In the world. The channel also enables them to bet on the main money market prices that are sensitive to Chinese monetary policy, according to Bloomberg, and Al Arabiya.net reviewed it.
The new program takes off as China’s sovereign bond market has been rising for regarding 7 straight weeks, with traders growing confident that the central bank will ease policy as the economic recovery falters. The tool also helps Beijing’s goal of opening up to more global investors following the regulatory crackdown, while rising geopolitical tensions have fueled concern regarding investing in the country even as it scrapped Covid-19 controls and reopened its borders.
“The Chinese authorities hope to attract global investors to the internal financial market, and Swap Connect is a step forward in this direction,” said Hao Hong, chief economist of the Grow Investment Group in Shanghai. “Swap Connect alone may not be able to deter outflows in the short term, but we believe that Chinese sovereign bonds will remain attractive to some foreign investors due to their safety and stability,” he added.
China has set a 20 billion yuan ($2.9 billion) daily net trading limit under its “Swap Connect” programme. Eligible instruments include 7-day fixed repo rate swaps, 3-month and overnight Shanghai interbank rate. HSBC, Citigroup and JPMorgan are among the 20 banks authorized to structure deals for foreign funds through Hong Kong.
The new stock program – known as “Stock Connect” launched in 2014, and the bond program – Bond Connect launched in 2017 – are both jointly run by the Shanghai Clearing Corporation, the Hong Kong Exchange and Clearing Corporation, and the China Foreign Exchange Trading System. At first it will only operate in the north direction, allowing international and Hong Kong investors access to Chinese interest rate swaps.
For its part, “HSBC Holdings Plc” said that it had made deals through the “Swap Connect” channel for several clients abroad and Hong Kong today, Monday, including “Dymon Asia” and “CSI Capital Management”.
greater than the bond
“Foreign investors’ market share in onshore IRS following the launch of Swap Connect will be greater than their share of Chinese bonds,” said Hua Weng, head of onshore China trading rates at BNP Paribas SA, another authorized bank. “Offshore hedge funds are constrained by their balance sheet,” he added. public to participate in the bond market, but the enthusiasm for them to participate in the derivatives market will be greater than their appetite for bonds.
The new risk hedge is being introduced as rising US interest rates have put outflow pressure on the Chinese bond market, with offshore funds reducing holdings by $169 billion over the past five quarters.
At the same time, global investors still own 10 times as many securities as they did a decade ago.
China currently allows some foreign investors access to inland interest rate swaps under the China Interbank Bond Market scheme, but Swap Connect will greatly expand this capability across Hong Kong.
Pan Gongsheng, deputy governor of the People’s Bank of China (PBOC), said at the opening ceremony that Swap Connect shows the high priority the PBOC gives Hong Kong as a global financial center and its support for the city’s long-term development and stability. The Hong Kong Monetary Authority will work with mainland authorities to provide more diversified risk management tools for international investors, according to a statement.
narrower margins
One of the effects of Swap Connect will be to reduce demand from foreign investors for offshore interest rate swaps, which have bid-ask spreads larger than domestic spreads due to weaker liquidity.
The average bid-ask spread is 0.25 basis points for the 7-day repo rate swaps, compared to 1.5 basis points for its offshore counterpart.
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