Global Investors in Mainland Swap Market Permitted to Use Onshore Bonds as Collateral

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The launch ceremony of "Northbound Swap Connect" in Beijing On May 15, 2023. Photo: VCG

Global investors will be able to use Chinese onshore government or policy bank bonds as collateral in swap trading through a program connecting the Chinese mainland and Hong Kong.

This decision, announced Tuesday by the People’s Bank of China, will allow these bonds to be used as collateral for swap transactions through the Northbound Swap Connect if they are purchased under the Bond Connect program.

The change is expected to take effect by the end of the year, according to Hong Kong Exchanges and Clearing Ltd. (HKEX).

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Global investors can use Chinese onshore government or policy bank bonds as collateral in swap trading via the Northbound Swap Connect by year-end.
The Swap Connect program, launched in May 2023, and the Bond Connect program, launched in July 2017, aim to integrate overseas and mainland markets.
The inclusion of these bonds as collateral aims to reduce liquidity costs and enhance the attractiveness of onshore bonds for offshore investors.

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Who’s Who

Hong Kong Exchanges and Clearing Ltd. (HKEX): Hong Kong Exchanges and Clearing Ltd. (HKEX) announced that the decision to allow Chinese onshore government or policy bank bonds as collateral in swap trading through the Northbound Swap Connect is expected to take effect by the end of the year. As of May, 61 overseas institutions had traded mainland swaps through this connect, with an average daily trading volume of 20 billion yuan ($2.8 billion).

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What Happened When

July 2017：: The northbound channel of the Bond Connect program is launched.

May 2023：: The northbound leg of the Swap Connect program is launched.

End of May 2024：: 61 overseas institutions had traded mainland swaps through Northbound Swap Connect, with an average daily trading volume of 20 billion yuan.

July 9, 2024：: The People's Bank of China announces that Chinese onshore government or policy bank bonds can be used as collateral for swap transactions through Northbound Swap Connect.

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