(Yicai Global) July 4 -- China and Hong Kong will allow mutual access to interest-rate swap trading from early next year in another step by China’s financial regulators to open up the mainland’s capital markets and to better meet the needs of foreign investors.

Overseas investors in Hong Kong will be able to participate in the Chinese yuan interest-rate swap market through the interconnection of Chinese and foreign electronic trading platforms or the central clearing agency, China’s central bank and the Hong Kong financial regulator said today.

As foreign debt holdings of China’s interbank bond market continue to grow, international investors’ demand for interest-rate risk management using derivatives is on the rise, the People’s Bank of China said. The swap business can reduce the impact of interest rate fluctuations on the value of bonds and further promote the internationalization of the yuan. It will also help increase global participation in the mainland bond market.

The Hong Kong Monetary Authority will also open up ‘southbound trading’ to enhance the depth and width of Hong Kong’s bond market, Chief Executive Yu Weiwen said at today's press conference. On the one hand, it will meet the demand of mainland investors for diversified allocation of overseas bonds. On the other hand, it will attract more mainland and foreign institutions to issue bonds in Hong Kong.

The PBOC and HKMA will also upgrade the existing currency swap facility to a standing swap arrangement, which means the trade will be valid for a long time and does not need to be regularly renewed, they said. The size has also been expanded to CNY800 billion (USD120 billion) from CNY500 billion (USD74.6 billion).

Since the launch of the Bond Connect five years ago, which allows foreign institutions access to the mainland bond market through Hong Kong, offshore investors had bought CNY3.7 trillion (USD560 billion) worth of Chinese bonds as of the end of May, an increase of CNY2.8 trillion from the pre-Bond Connect period.

The interest-rate swap program was launched in the mainland interbank market in 2006. Last year, CNY21.1 trillion (USD3.1 trillion) was traded.

Editor: Kim Taylor