HKEX Expands Connect Scheme, Strengthening Chinese Bonds

Hong Kong Exchanges & Clearing (HKEX) unveiled its latest initiative on Monday, adding a new Connect scheme that connects the financial hub's markets with the mainland. The expansion involves incorporating onshore interest rate derivatives, providing offshore investors in Chinese bonds with a means to hedge their exposure effectively.

Nicolas Aguzin, CEO of HKEX, expressed his optimism about the new interest rate Swap Connect scheme, stating that it would further bolster the global status of the yuan currency. The scheme's introduction aims to assist offshore investors in managing interest rate risk and reducing financing costs. Additionally, it is expected to enhance clearing efficiency and optimize capital usage, as highlighted by Haifeng Xu, the deputy chief executive at the Bank of China (Hong Kong).

Xu emphasized the ongoing efforts of mainland China and Hong Kong regulators to refine the Connect schemes in recent years, expanding channels for offshore investors to engage in investment and financing activities in onshore markets. These continuous improvements have significantly enhanced convenience and accessibility for market participants.

The initial net daily trading quota for the North Bound Connect of the new scheme has been set at 20 billion yuan ($2.89 billion), according to previous announcements. Market conditions will dictate whether adjustments to the quota will be necessary in the future. Swap Connect was initially announced by regulators in July 2022, and the launch was originally scheduled for six months thereafter.

Commenting on the development, Jizhi Zeng, head of financial markets at Standard Chartered Hong Kong and the Greater Bay Area, described Swap Connect as a noteworthy milestone connecting capital markets in Hong Kong and the mainland. Zeng further noted that this initiative would foster synergies with the existing Bond Connect scheme, reinforcing the overall growth and development of both markets.

The expansion of HKEX's Connect scheme to include onshore interest rate derivatives signifies a significant step forward in bridging the gap between Hong Kong and mainland China's capital markets. It presents offshore investors with a valuable tool for managing risk and accessing the thriving Chinese bond market. The integration of Swap Connect is expected to boost the international standing of the yuan currency, promoting its widespread usage and solidifying its role in global finance.

The ongoing optimization of the Connect schemes by regulators underscores their commitment to facilitating investment and financing activities between mainland China and Hong Kong. These efforts are crucial in ensuring a seamless and convenient experience for market participants, while also reinforcing the mutual growth and interdependence of the two financial ecosystems.

As the scheme commences with an initial trading quota, market participants will closely monitor its performance and its impact on the broader financial landscape. Any future adjustments to the quota will reflect the evolving market conditions and the scheme's efficacy in meeting the demands and requirements of offshore investors.

Overall, HKEX's expansion of the Connect scheme through the introduction of onshore interest rate derivatives represents a strategic move towards strengthening ties between Hong Kong and mainland China's capital markets. The scheme's successful implementation has the potential to drive greater investment, enhance risk management capabilities, and facilitate the growth of the Chinese bond market, ultimately fostering the continued development of both regions' financial sectors.

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