BEIJING (BLOOMBERG, REUTERS) - China and Hong Kong are working to develop a trading arrangement to allow overseas investors to execute interest rate derivatives with onshore traders. 

The so-called Swap Connect is now subject to regulatory approvals, market readiness and the completion of operational arrangements, according to a joint statement by the People’s Bank of China (PBOC) and the Hong Kong Monetary Authority (HKMA). The programe will be launched in six months, according to the statement.

The move comes days after Chinese President Xi Jinping’s visit to Hong Kong to commemorate the former British colony’s 25th anniversary of Chinese rule. The new facility reinforces the city’s role as a gateway to Chinese markets after the launch of Stock Connect in 2014 and Bond Connect in 2017.

Mr Xi said last Thursday during the rare visit to the global financial hub that the city has overcome its challenges and “risen from the ashes”. He also said China would support Hong Kong’s role as an international finance and trade hub.

Swap Connect will create synergy with Bond Connect and help global investors manage interest rate risks for their bond investments on the mainland, said HKMA chief executive Eddie Yue. Overseas investors ramped up China bond holdings to 4 trillion yuan (S$835 billion) as at end-2021, which is about 3.5 per cent of the total outstanding, PBOC data show. 

Only northbound trading will be permitted at the initial stage, which means foreign investors can trade onshore interest rate swaps but not the other way around. Southbound trading, which enables mainland investors to trade offshore contracts, will be explored in due course.

Other derivatives can also be included as part of the arrangement depending on market conditions, according to the statement. China will also raise its currency swap with Hong Kong to 800 billion yuan from 500 billion yuan, the PBOC said in another announcement.