China's financial market opening-up gathers speed with swap, ETF connects
Wang Hui

China has taken another major step in the opening up of its financial markets with the launch of the swap and exchange-traded fund (ETF) connects between the Chinese mainland and Hong Kong that market experts considered as clear indications of China further opening up its financial market to global investors.

The People's Bank of China, China's central bank, announced earlier this week that it will allow mutual access between the interest rate swap markets of Hong Kong and the mainland. The Swap Connect scheme is expected to be officially launched in six months.

Swap Connect refers to an arrangement that will enable investors to participate in interest rate swaps in both markets. Northbound Trading in swaps will commence initially – this will allow investors from Hong Kong and other countries and regions to participate in the Chinese Mainland interbank financial derivatives market. 

Kevin Liu, managing director of research at China International Capital Corporation Ltd., said the new measures are of immense benefit to international investors keen on tapping the huge Chinese market.

"It will definitely help international investors better manage their portfolios, by providing a tool to manage their interest rate risk. Using that product, it can help investors to hedge that risk. This, in turn, will improve the attractiveness of Chinese onshore bond assets, by providing more risk management tools," Liu said. 

Beijing has also launched ETF Connect that taps into international investors' growing demand for onshore ETFs, or exchange-traded fund products. They are products passively traded in basket stocks. ETF Connect refers to the connection which allows domestic and foreign investors access the ETF products listed on the onshore A-share market and the Hong Kong market.

Liu said that the ETF Connect will increase the international appeal of the A-share market, especially for long-term investors interested in China's sector rotation and thematic opportunities. He added that the swap and ETF connects indicate Beijing’s firm resolve to the further opening up of China’s financial markets.

"They are clear signals that Chinese policymakers intend to continue efforts to further open up capital markets," Liu said. 

"Ever since the 2014 stock connect, the 2016 Shenzhen-Hong Kong stock connect, the 2017 bond connect, and now the ETF connect and SWAP connect, every step marked an important milestone to not just open the domestic financial market to foreign investors, but to also facilitate their investment in domestic markets," he added. 

Liu believes the measures will lead to the further liberalization of China's financial markets and increase the attractiveness of yuan-denominated assets. It will also go a long way, he added, in meeting Chinese investors desire to diversify their portfolios globally.

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