The launch of Hong Kong’s Swap Connect program, which gives global investors easy access to China’s $5 trillion swap market, has been delayed because regulators in Beijing failed to issue the rules needed to create the trading system, according to people familiar with the situation have completed work.
Announced during Chinese President Xi Jinping’s visit to the city in July, Swap Connect was positioned by officials as a key new channel for further opening up China’s vast mainland markets. The move has also been hailed as a boon for Hong Kong, where COVID-19 restrictions have choked the economy and eroded the financial sector’s competitiveness.
But the program is unlikely to achieve its scheduled launch in early January, two people familiar with the matter said, as regulators in Beijing have failed to release even basic information about the program’s final rules nearly five months after its unveiling.
“Financial institutions are very interested but nobody has seen details,” said the head of an industry association in Hong Kong, adding that regulators in the city and mainland China need to address a number of pressing issues. before rules are published.
“It’s about complex jurisdiction and legal issues,” said the industry boss. “It’s not just about making a deal. I don’t know how that can be achieved in early January.”
Swap Connect aligns with Hong Kong’s successful stock and bond linking schemes, allowing offshore investors to access China’s bond and equity markets in Shanghai and Shenzhen.
The newest link will initially give only foreign investors access to China’s renminbi-denominated interest rate swaps market, which has grown to about $5 trillion over the past year, according to data provider Clarus Financial Technology. There are plans to expand its scope and eventually allow mainland traders to access the Hong Kong swap market.
Swap Connect was first announced on July 4 by the People’s Bank of China, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority. It is managed by Hong Kong Exchanges and Clearing in partnership with the China Foreign Exchange Trading System and the Shanghai Clearing House.
In their announcement, regulators said the launch of the program “will take place six months from the date of this announcement,” while a separate statement from the HKMA said relevant institutions were working to “launch Swap Connect within six months.”
A later statement by the Hong Kong government confirmed that the program would officially launch in six months “after the completion of preparatory work, including the finalization of relevant rules and systems development and the obtaining of regulatory approvals”.
In response to requests for comment, the HKMA referred any questions regarding Swap Connect to the SFC as the system’s lead regulator, while the SFC said: “As expected at the time of the joint announcement in July, the preparatory work is expected to take six months or more.” HKEX said: “No launch date has been confirmed yet.”
Hong Kong Chief Executive John Lee hailed the program as a “milestone” in the city’s financial integration with the mainland, which “will boost investor confidence in our country’s continued support for Hong Kong’s development as an international financial hub.”
The expected delay in providing global investors with greater access to interest rate hedging instruments in China is the result of continued and significant outflows from the country’s domestic bond market.
Foreign investors dumped RMB691 billion ($97 billion) worth of Chinese government debt in favor of dollar-denominated bonds this year as Federal Reserve rate hikes pushed US Treasury yields above their renminbi-denominated counterparts.
An official at an onshore organization with ties to the PBoC said the Swap Connect documents circulated internally in recent months are “basic and not detailed”. Industry veterans also said it would take time for Swap Connect to launch once the rules are finally released.
“The idea is that the link will be operational within a few months when they issue the final rules,” said the head of legal at another industry group in Hong Kong. “I’m pretty confident. [the Swap Connect] it will be released in the first half of next year.”
More news from Cheng Leng in Hong Kong