(Yicai) Aug. 4 -- Chinese government bond futures have started trading in Hong Kong, the first time that a CGB futures contract has been traded offshore, in a move that the head of the China Securities Regulatory Commission described as “a  milestone.”

Hong Kong Exchanges and Clearing launched trading of the five-year CGB futures contract yesterday, expanding the bourse’s growing China-related product suite and complementing its existing mutual market access programs, including the bond and swap connects.

“The debut of this important product will further enrich the usage scenarios of offshore yuan, reinforce Hong Kong's function as a global offshore yuan hub, and better enhance the effectiveness of financial services in supporting the real economy,” CSRC Chairman Wu Qing said at the launch ceremony.

Offshore CGB futures are financial instruments designed for international investors to hedge interest rate risks linked with their onshore Chinese bond holdings. They will allow investors to take long or short positions on movements in Chinese government bond prices or hedge existing exposures, while being priced and settled entirely in the offshore market.

Their launch “further strengthens Hong Kong’s offshore yuan product suite, supports the continued internationalization of the currency, and reinforces the city’s position as a comprehensive platform for capital formation, trading, and risk management,” HKEX Chairman Carlsong Tong said.

“From Bond Connect and Swap Connect to our growing derivatives, commodities, and fixed-income and currency offerings, we are creating a more integrated ecosystem that enables investors to allocate capital, manage risks, and access new opportunities,” HKEX Chief Executive Bonnie Chan said.

Yuan Rate Pricing

Overseas institutions held CNY3.2 trillion (USD473.5 billion) of notes in the China Interbank Bond Market as of mid-June, according to data from the Shanghai branch of the People’s Bank of China. About CNY2 trillion were CGBs, accounting for 63 percent of the total.

Offshore CGB futures will enable overseas investors to participate in yuan interest rate pricing through the Hong Kong market, Zheng Yu, a professor in the International Finance Law School of East China University of Political Science and Law, told Yicai. This should help more accurately reflect the collective expectations of market participants on economic conditions and future rate trends, while also attracting a broader range of investors and capital, Zheng said.

As the world's largest offshore yuan market, Hong Kong provides a more convenient venue and broader range of use cases for offshore yuan business, Zheng noted, adding that through two-way interaction with the Chinese mainland market, a more complete market system for yuan interest rates can gradually take shape.

The product debut will improve the offshore yuan yield curve, according to Xia Chun, founder and chief economist at Zhihui Group. It gives Hong Kong independent pricing capacity for offshore yuan interest rates and effectively strengthens its pricing power over offshore yuan assets, he told Yicai.

 “Hong Kong will evolve from a traditional offshore yuan settlement and financing hub to a global center for offshore yuan trading and risk management, reinforcing its role as the super-connector between the mainland market and global capital,” Xia said.

Deeper China-Hong Kong Link

Launched in 2017, the Bond Connect already gave international investors access to yuan-denominated bonds, while the Swap Connect and offshore yuan interest rate swaps catered to over-the-counter risk management. In addition, Qualified Foreign Investors have been permitted to hedge using CGB futures on the China Financial Futures Exchange since this April.

Hong Kong-traded CGB futures fill a gap by offering standardized, OTC duration management tools that can be traded intraday, complete the “last link” of offshore yuan rate risk management framework, and round out the investment ecosystem, which includes the bond and swap connects, and now CGB futures, according to industry insiders.

The broader significance of offshore CGB trading in Hong Kong lies in what it signals for capital market integration between the mainland and the special administrative region.

At the launch ceremony, the CSRC’s Wu also announced new measures to deepen cooperation and connectivity between the two financial markets and support the continued development of Hong Kong as an international financial center.

The measures include ongoing support for mainland corporate listings in Hong Kong and for eHong Kong-listed firms to float in the mainland, backing index providers in both markets to strengthen cooperation and launch more indexes based on Chinese assets, deepening cooperation between the two futures markets to support the launch of a wider range of yuan-based products in Hong Kong, and assisting institutions in both markets to launch more exchange-traded funds.  

“Against the backdrop of the Chinese financial sector’s growing internationalization, this new initiative to deepen financial cooperation between the mainland and Hong Kong focuses on smoothing connectivity channels to achieve closer, systematic alignment of products, services, and talent across all levels,” said Hu Jie, practicing professor at the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, and former senior economist at the US Federal Reserve.

Editors: Tang Shihua, Futura Costaglione