The launch of a new program called Swap Connect between mainland China and Hong Kong. This program will provide easier access to onshore interest-rate swaps, which had an annual turnover of $3 trillion last year. This will allow global investors to hedge their exposure to China's bond market and bet on key money-market rates that are sensitive to China's monetary policy.


The program is being launched just as China's sovereign bond market experiences a seven-week rally, with traders growing more confident that the central bank will ease policy as the economic recovery stutters. The program is also part of Beijing's aim to open up to more global investors after regulatory crackdowns and rising geopolitical tensions fueled concerns over the nation's investability.


HSBC Holdings Plc has already made Swap Connect trades for several overseas and Hong Kong clients, including Dymon Asia and CSI Capital Management.


The program has a daily limit of 20 billion yuan ($2.9 billion) for net trading, and eligible instruments include swaps referencing the seven-day fixing repurchase rate, the three-month rate, and the overnight Shanghai Interbank Offered Rate. HSBC, Citigroup Inc., and JPMorgan Chase & Co. are among the 20 banks authorized to structure trades for foreign funds through Hong Kong.


The new program is being jointly administered by Shanghai Clearing House, Hong Kong Exchanges & Clearing Ltd., and China Foreign-Exchange Trade System. Initially, the program only works in the "Northbound" direction, allowing international and Hong Kong investors to access Chinese interest-rate swaps.


One impact of the Swap Connect program will be to reduce demand from overseas investors for offshore interest-rate swaps, which have wider bid-ask spreads than onshore ones due to their thinner liquidity. The program will also have a single margin pool between the two central clearing agencies, which will reduce trading costs.


While Swap Connect may not be able to immediately reverse the recent bond sales by overseas investors, its advantages will become clearer over the longer term. Chinese sovereign bonds will remain attractive to some foreign investors given their safety and stability. Overall, Swap Connect is a step forward in China's efforts to woo global investors into the onshore financial market.