Montage of the People’s Bank of China exterior and renminbi banknotes
The Swap Connect scheme was first announced in July 2022 by the People’s Bank of China, Hong Kong’s Securities and Futures Commission and the Hong Kong Monetary Authority. © FT montage/Bloomberg

China’s delayed Swap Connect scheme has won regulatory approval and is set to launch within months, opening up a $5tn swaps market to foreign investors needing to hedge their exposure to renminbi debt.

Final rules for the programme were recently agreed by China and Hong Kong authorities, three people familiar with the matter told the Financial Times.

The new programme, giving easier access to tools for hedging interest rate risk, comes as a widening interest rate differential between Chinese and US government debt has driven outflows from the country’s renminbi bond market.

Data from Hong Kong’s Bond Connect programme shows that investors have dumped more than Rmb865bn ($126bn) worth of renminbi bonds since the start of 2022.

Officials hope the scheme, which will initially provide access only to interest-rate swaps for onshore renminbi government bonds, will help to stem the outflows.

“Since last year, foreign holdings of renminbi bonds have dropped a lot and there’s an urgent need to increase those,” said a foreign exchange trader with one western bank in Shanghai.

Line chart of Yield on 10-year government bonds (%) showing Interest rate differential spurs outflows from China's bond market

The Swap Connect scheme was announced during a visit by President Xi Jinping to Hong Kong last July, with the planned launch six months later having to be delayed in the absence of regulations governing how exactly it would function.

It has been framed by officials as an important link between foreign and Chinese finance, similar to the city’s Stock Connect and Bond Connect programmes that allow non-mainland investors to trade securities in Shanghai and Shenzhen.

Investors often use futures to hedge interest rate risk, but China has been reluctant to grant foreign traders greater access to its relatively illiquid onshore market for government bond futures.

The new programme will instead open up the country’s more liquid market in interest rate swaps, an alternative tool to allow offshore holders of renminbi bonds to hedge risk by swapping one stream of interest payments for another.

People familiar with the launch plans for the Swap Connect said that Hong Kong Exchanges and Clearing (HKEX) had not yet received a date for the programme’s start, but a Hong Kong-based official with a large European lender said the Swap Connect was “technically ready”.

“They’ll be trading by June, but it could go sooner,” said another of the people with knowledge on the matter.

The Swap Connect was first announced by the People’s Bank of China (PBoC), Hong Kong’s Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA). The programme will be run by HKEX together with Shanghai Clearing House and the China Foreign Exchange Trade System.

This week, the launch of the programme was flagged as a priority by Eddie Yue, chief executive of the HKMA, during a visit to Beijing. Yue met mainland regulators including Yi Gang, governor of the PBoC, and Pan Gongsheng, head of the foreign exchange administration.

Yue told a financial conference in Beijing on Wednesday that the Swap Connect would launch “as soon as possible”. He said foreign access to China’s interest rate swaps market “can prevent heavy sell-offs for bonds, decrease market volatility and improve financial stability”.

The PBoC did not immediately respond to a request for comment. The HKMA declined to comment.

The SFC said it had been “working closely with relevant parties” on preparations for the trading scheme and “will inform the market about the target launch date once ready”.

HKEX declined to comment directly on the timing of the launch but said the exchange and its partners “continue to make good progress on the necessary preparatory work for the launch of Swap Connect”.

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