(Yicai Global) May 15 -- The brand new interest rate swap scheme between China's mainland and Hong Kong gives foreign investors their first access to the mainland's interbank derivatives market to help them hedge against rate fluctuations.

Ahead of southbound trading, the opening of the northbound Swap Connect today is an important move for the opening-up of the mainland bond market to extend from spot trading to derivatives, analysts said to Yicai Global. Trades are settled in yuan and in the early stages, the daily limit for the whole market is CNY20 billion (USD2.9 billion).

Offshore investors' demand for hedging tools has risen as their holdings of bonds trading on China's mainland have quadrupled to exceed CNY3 trillion (USD431.1 billion) since the bond connect started working in 2017, per statistics from the central bank.

The new trading channel is an important step for the interbank interest rate derivatives market to open up to the rest of the world, according to Lin Ronghui, general manager of Industrial Bank's fund center. It can help improve the pricing mechanism of China's benchmark rates while promoting cross-border integration, Lin added.

The Swap Connect will help overseas investors control risks arising from interest rate fluctuations, cut financing costs, and pay more attention to the long-term investment value of China’s bond market, per Xu Haifeng, vice president of Bank of China Hong Kong.

The program will help diversify the ecosystem of yuan-denominated assets and further advance the broader and more sustainable internationalization of the yuan, Nicolas Aguzin, chief executive of Hong Kong Exchanges and Clearing, said during the launch ceremony today.

Editor: Emmi Laine, Xiao Yi