Text/Xiabin

  In one day, the two-way opening of China's financial market ushered in three major events!

  First, start the "Swap Link" between Hong Kong and the Mainland.

  Second, establish a standing swap arrangement between the RMB and the Hong Kong dollar.

  Third, the integration of ETFs into the Mainland and Hong Kong stock market trading interconnection mechanism was officially launched.

  What changes will these three things bring?

Two-way opening results are remarkable

  On July 4, the fifth anniversary forum of "Bond Connect" and the launch ceremony of "Swap Connect" were held.

  The achievements made by China's financial market opening can be seen from the speech made by Pan Gongsheng, Vice Governor of the People's Bank of China, at the above forum.

  He said that over the past five years, "Bond Connect" has been running smoothly and efficiently, injecting new vitality and energy into deepening the reform and opening up of the financial market in the Mainland and for the development of Hong Kong as an international financial center.

In the past five years, the total amount of Chinese bonds held by foreign investors has grown at an average annual rate of about 40%, and the total amount of bonds currently held is about 3.7 trillion yuan.

  At the same time, Chinese bonds have been included in the world’s three major bond indices, including Bloomberg Barclays, JPMorgan Chase, and FTSE Russell, reflecting the growing international influence and attractiveness of the Chinese bond market, as well as global investors’ interest in China. Confidence in the long-term stable development of the economy and the continued expansion and opening of the financial market.

  Another series of data shows that by the end of May 2022, there were 1,038 overseas institutions entering the inter-bank market, covering more than 60 countries and regions including the United States, Canada, the United Kingdom, France, Germany, Italy, Japan, Singapore, and Australia.

  It is also in recent years that China's inter-bank bond market has been increasingly open to the outside world, and foreign investors' demand for RMB interest rate risk management has continued to increase.

  Recently, the Central Bank of China, together with the Hong Kong Securities Regulatory Commission, the Hong Kong Monetary Authority and other departments, on the basis of summarizing the successful experience of opening up the bond market to the outside world, in-depth research on the cross-border derivatives transaction clearing model, forming a "swap" scheme, which is convenient through interconnection. The participation of foreign investors in the domestic RMB interest rate swap market supports the establishment of a high-level financial opening pattern.

"Swap through" brings three major benefits

  On the same day, the People's Bank of China, the Hong Kong Securities Regulatory Commission and the Hong Kong Monetary Authority issued a joint announcement to carry out the interconnection and cooperation between the interest rate swap market between Hong Kong and the Mainland, namely the "Swap Connect", which will be officially launched 6 months from now.

  In the official view, "swap through" will bring three major benefits.

First, it is helpful for foreign investors to manage interest rate risk.

The launch of "Swap Connect" can facilitate foreign investors to use interest rate swaps to manage risks, reduce the impact of interest rate fluctuations on the value of bonds they hold, smooth cross-border capital flows, and further promote the internationalization of the RMB.

  Second, it is conducive to promoting the development of the domestic interest rate derivatives market.

After the launch of the "Swap Connect", overseas institutions have brought about an increase in differentiated demand, supplemented by the advantages of efficient electronic transactions and closely connected transaction clearing links, which will help improve market liquidity and promote the further development of the inter-bank interest rate derivatives market. develop and form a virtuous circle.

  Third, it will help consolidate Hong Kong's status as an international financial center.

As an important measure for the opening up of my country's financial derivatives market, the launch of "Swap Connect" is a concrete implementation of the "14th Five-Year Plan" on strengthening the functions of Hong Kong's international asset management center and risk management center, which is conducive to enhancing Hong Kong's role as an international financial The attractiveness of the center will deepen the cooperation between the mainland and Hong Kong financial markets.

  "We welcome the joint announcement by the People's Bank of China, the Hong Kong Securities Regulatory Commission and the Hong Kong Monetary Authority to launch the interconnection of the Hong Kong and Mainland interest rate swap markets. Global investors are encouraged by China's continued commitment to opening up its financial markets." Bloomberg Asia Pacific President Li Bing said.

  Li Bing said that this move will not only enrich the risk management tools available to investors and provide more choices for their diversified investment portfolios, but also expand the possibility of opening up more derivatives, which will further release foreign investors. Potential to participate in the Chinese bond market.

  At the same time, domestic market makers are also faced with an important opportunity to continuously improve their service levels, which will ultimately promote the development of China's financial market.

For Hong Kong, the move will help cement its unique position as a gateway between China Unicom and international markets.

  The person in charge of the Shanghai RMB trading business headquarters of Bank of China believes that the launch of the "Swap Connect" is a major innovation in the opening up of the RMB interest rate derivatives business, and it is an effective supplement to the existing settlement agency model for RMB interest rate swap products. Following the "Bond Connect", it is another important milestone in the high-quality development of China's bond market and the internationalization of the RMB.

  For foreign investors, the "Swap Connect" does not change the existing overseas trading habits, and improves the convenience for foreign investors to participate; the centralized clearing mechanism effectively improves the efficiency of foreign investors' counterparty credit risk management and reduces costs.

At the same time, the "Swap Connect" provides the convenience of efficient and diversified risk hedging, and further supports foreign investors to expand their demand for RMB bond investment.

  For China's bond market, the "Swap Connect" has brought about the improvement of risk hedging efficiency and the optimization of the cross-border investment environment, which will attract more foreign investors to enter the market, enrich the types of investors, increase the scale of transactions, and improve transaction flow in the process of market expansion. Improve the institutional environment in business interaction, deepen market opening and development and cross-border cooperation with high quality, and promote the process of RMB internationalization.

Standing Swap Agreement Appears for the First Time

  The new financial opening-up policy also includes the establishment of a standing swap arrangement between the RMB and the Hong Kong dollar.

  According to the news, the People's Bank of China and the Hong Kong Monetary Authority recently signed a standing swap agreement to upgrade the currency swap arrangement established by the two sides since 2009 to a standing swap arrangement. /HKD 590 billion to RMB 800 billion / HKD 940 billion to further deepen the financial cooperation between the mainland and Hong Kong, better support the construction of Hong Kong’s international financial center, and promote the steady development of Hong Kong’s offshore RMB market.

  A person in charge of the People's Bank of China said that up to now, the People's Bank of China has signed bilateral local currency swap agreements with central banks or monetary authorities in 40 countries and regions. This is the first time the People's Bank of China has signed a standing swap agreement.

"Standing" mainly means that the agreement is valid for a long time and does not need to be renewed regularly. At the same time, the exchange process will be further optimized, and the use of funds will be more convenient.

  The person in charge said that the signing of the standing swap agreement between the People's Bank of China and the Hong Kong Monetary Authority is mainly to meet the needs of in-depth financial cooperation and development between the mainland and Hong Kong.

In recent years, the financial cooperation between the Mainland and Hong Kong has been deepened. The capital market interconnection mechanisms such as Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, Bond Connect, Fund Mutual Recognition, and Cross-border Wealth Management Connect have continued to advance. Hong Kong's RMB offshore market has developed steadily. Hong Kong has become a The most important clearing center, product center and capital center for offshore RMB.

The Hong Kong Monetary Authority has always been the main swap counterparty of the People's Bank of China. Upgrading the original currency swap to a standing swap arrangement is in line with the inherent requirement of deepening financial cooperation between the Mainland and Hong Kong, as well as the inherent requirement of the opening-up and development of the financial market.

Internationally, there are similar standing swap arrangements between central banks in many economies.

  The above-mentioned person in charge said that the establishment of a standing swap arrangement between the People's Bank of China and the Hong Kong Monetary Authority and the appropriate expansion of the scale of swap funds can provide the Hong Kong market with more stable and long-term liquidity support, which is conducive to stabilizing market expectations and enhancing the endogenous development of the market. Driven to better play the role of Hong Kong's offshore RMB business hub.

This year marks the 25th anniversary of Hong Kong's return to the motherland. The signing of the agreement will help consolidate Hong Kong's status as an international financial center and promote the long-term prosperity and development of Hong Kong's financial industry.

ETF "inclusion" interconnection

  The financial market also ushered in a new "playing game" on the 4th.

There are 53, 30 and 4 ETF products under Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Hong Kong Stock Connect, respectively, which are officially included in the Mainland and Hong Kong stock market trading interconnection mechanism (hereinafter referred to as "Connectivity").

  According to statistics from Wind Information, as of July 1, 83 ETFs have been included in Mainland Stock Connect (Shanghai-Hong Kong Stock Connect + Shenzhen-Hong Kong Stock Connect), with a total scale of 674.63 billion yuan.

  In terms of ETF types, 26 broad-based ETFs have a scale of 298.412 billion yuan, mainly CSI 300, CSI 500 and ChiNext Index, etc.; 57 industry-themed funds with a total scale of 376.218 billion yuan, mainly for finance, consumption, Medicine, new energy, chips, defense industry, etc.

  Christina Ma, Head of Greater China Equity Business at Goldman Sachs Global Markets Department, told China News Service that this is a landmark event for the expansion of new trading tools since the establishment of the stock market interconnection mechanism, which not only further strengthened the mainland , the integration of the Hong Kong market also represents the first step in the opening of China's ETF market to international investors.

  Ma Zhiping said that since the comprehensive coverage of ETFs covering core assets or industry themes is wider, it indirectly broadens the scope of investors to allocate more high-quality A-share and Hong Kong-stock assets across borders. Therefore, the market, especially northbound investors, is not interested in ETFs being included in the Internet. The interoperability mechanism has been long-awaited.

In the past two years, China has launched discussions with Singapore and South Korea on the ETF interoperability mechanism, and ETFs are expected to develop into a mainstream trading tool in the future.

  "The continuous enrichment of the interconnection mechanism will continue to expand the proportion of institutional investors in the domestic capital market, promote two-way cross-border investment, improve market liquidity and stability, and promote the steady development of the capital market and asset management industry. As a settlement currency, it can enhance the liquidity of RMB under the capital account of domestic and foreign markets, improve the use of RMB as an investment currency, and also contribute to the medium and long-term development of RMB internationalization." Ma Zhiping said.

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