Global investors seeking to trade China’s reopening will have a new strategic tool from Monday: onshore interest-rate swaps that had an annual turnover of $3 trillion last year, reports Bloomberg. The so-called Swap Connect program between mainland China and Hong Kong will provide overseas funds with easier access to the derivatives that will help hedge their exposure to the world’s second-biggest bond market. The scheme will also enable them to bet on key money-market rates that are sensitive to China’s monetary policy.
The new program kicks off just as China’s sovereign bond market puts on a seven-week rally, with traders growing more confident the central bank will ease policy as an economic recovery stutters. The new channel also helps Beijing’s aim of opening up to more global investors after regulatory crackdowns, and rising geopolitical tensions fueled concern over the nation’s investability even after it scrapped Covid controls and re-opened its borders.
China has set a RMB 20 billion ($2.9 billion) daily limit for net trading under Swap Connect, and instruments eligible include swaps referencing the seven-day fixing repurchase rate, and the three-month and overnight Shanghai Interbank Offered Rate. HSBC Holdings, Citigroup and JPMorgan Chase are among the 20 banks authorized to structure trades for foreign funds through Hong Kong.
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