China Swap Connect Trading Volume Heads Toward 1 Trillion Yuan

Trading volumes through China's Swap Connect are poised to accelerate as a growing appetite for yuan debt drives a surge in hedging demand, according to strategists. The platform, which grants offshore investors access to mainland interest-rate swaps, could see monthly volumes jump to about 1 trillion yuan ($147 billion), BNP Paribas Securities (China) and Australia & New Zealand Banking Group Ltd. say. That would surpass the record 820.8 billion yuan reached in March, the highest since the link's launch in May 2023. according to data compiled by Bloomberg based on data from Bond Connect Company Ltd. The number of participating institutions is also at a record high of 95. This projected surge in Swap Connect volumes underscores a shift in how global funds engage with the world's second-largest bond market. As debt from US to Japan loses appeal on mounting fiscal and inflation concerns, Chinese notes are emerging as a global haven alternative bolstered by Beijing's perceived insulation from energy shocks sparked by the Iran conflict. Broader participation from investors could accelerate expansion of the Swap Connect, with monthly volumes potentially surpassing 1 trillion yuan over the next one to two years, said Xing Zhaopeng, a senior China strategist at ANZ. "The current hedging ratio remains relatively low, and demand is expected to rise further as interest-rate risks increase," he said. Global investors use Swap Connect to protect their onshore bond holdings from fluctuations in interest rates. By locking in fixed rates, offshore funds can offset yield volatility and better manage their exposure to Chinese market benchmarks. "Sustained additions of three‑plus new participants per month would be a reasonable expectation, provided rate‑curve volatility does not fully normalize and further product enhancements continue," said Wei Li, head of multi-asset investments at BNP Paribas Securities (China). His base case is for Swap Connect volumes to reach 1 trillion yuan in the second half of the year. The platform is emerging as a key pillar in Beijing's push to expand hedging tools for global investors. It complements the recent opening up of onshore bond futures for foreign investors and the planned launch of offshore contractsBloomberg Terminal in Hong Kong, moves designed to bolster the appeal of yuan-denominated assets. Exchange officials see these policy shifts as a long-term play for Hong Kong's relevance. "There's significant opportunity to further develop Swap Connect and deepen its linkages with Bond Connect and other market infrastructure," said Kevin Fan, head of fixed income and currency product development at the Hong Kong Exchanges and Clearing Ltd., whose subsidiary facilitates trading via Swap Connect. "By doing so, we aim to support more yuan bond issuance in Hong Kong and broader international participation while reinforcing Hong Kong's position as a key gateway," he said.