Thanks to the fast-expanding offshore yuan tradeIn the realm of global finance, the Securities and Futures Commission and the Hong Kong Monetary Authority have become more proactive in stepping outside their conventional responsibilities. In addition to serving as regulators and acting as a guarantor for Hong Kong's US dollar exchange rate, they must also demonstrate innovation in creating new financial pathways and broadening current ones.
The latest is a road mapCollaboratively developed by the two institutions to expand the use of offshore yuan and improve its liquidity. The two entities have a significant task ahead. The markets for fixed income and currency trading in offshore renminbi are vast and may one day compete with the bond and dollar trading markets in the United States; the roadmap seeks to move Hong Kong in that direction more quickly.
The key term appears to be expansion, meaning that billionaire family offices and investment funds will become part of an expanded group of investors for fixed income products. The cross-border repurchase agreement market—utilizing bonds issued by the mainland government and policy banks as collateral or borrowing tools—will be expanded to improve market liquidity, along with a futures market for offshore Chinese government bonds.
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Traveling northbound, or from Hong Kong to the mainland, the Swap Connect channel will increase its daily net trading limit to 45 billion yuan (US$6.3 billion) starting in mid-October, up from the current 20 billion. Introduced in 2023, it offers a new method for foreign investors to trade and manage interest rate risk within the local market.
Advanced electronic trading systems are being created to align with digitized or tokenized fixed income assets.Stablecoinsare digital instances utilizing blockchain technology.
In the meantime, investors are becoming more favorable towardsdim sum bonds, or bonds issued in offshore yuan. The Hong Kong market has expanded alongside the offshore yuan foreign exchange trading and interest rate derivative markets. As of August, dim sum bond issuances reached 475 billion yuan and are expected to surpass last year's record of 700 billion yuan. China aims to have it both ways – maintaining capital controls at home while promoting a more open yuan trade abroad. As long as this remains the case, Hong Kong will continue to be essential.
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This piece was first published in the South China Morning Post (www.scmp.com), a top news outlet covering China and Asia.
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