Financial regulators in Hong Kong and mainland China have announced further enhancements to the operation of the northbound Swap Connect, a key platform that allows international investors to tap the mainland’s interbank interest rate swap ( IRS ) markets to better manage the interest rate risk of their RMB assets.

The enhancements are aimed at improving the liquidity of China’s onshore fixed income assets in overseas markets.

The Swap Connect enhancements will focus on two aspects, according to the official notice. First, it will extend the maximum tenor of IRS contracts to 30 years, up from the current maximum tenor of 10 years. Second, it will add the one-year loan prime rate to the floating reference rate options, on top of the current reference rates menu of seven-days repo, three-month Shanghai interbank offered rate ( Shibor ), and the overnight Shibor.

Regulators will announce when the enhancements will take effect and other related details in due course.

The interbank IRS is a useful instrument for bond investors to hedge interest rate risks of the bonds they hold, and as such, can attract more investors to engage in bond trading and increase the bond market’s overall liquidity.

China’s bond market is now the second largest in the world, next only to that of the United States. As foreign investors’ confidence in China’s capital markets grows, their bond trading becomes more active.

According to data from Hong Kong Exchanges and Clearing’s ( HKEX ) Bond Connect, foreign holdings of China’s onshore bonds have grown to 4.35 trillion yuan ( US$602.38 billion ) as of March 2025, from 842.5 billion yuan in June 2017, when the programme started, for a compound annual growth rate exceeding 23%.

With the expansion of the onshore bond market, foreign investors expect to have more access to hedging tools in China’s onshore bond trading, primarily IRS. Echoing this demand, HKEX launched Swap Connect in May 2023, providing foreign participants with better access to financial derivatives in China, particularly, the onshore IRS at the interbank market.

Technically, foreign investors can hedge their onshore holdings via either onshore or offshore IRS. However, compared to offshore IRS, onshore IRS has a better correlation with onshore China bond yields, and tighter bid-ask spreads, based on Bloomberg’s historical data. Therefore, accessing onshore IRS through Swap Connect can improve foreign investors’ hedging efficiency.   

Between its official launch in May 2023 to the end of April 2025, more than 12,000 interest rate swap transactions have been conducted via Swap Connect with a total notional amount of about 6.5 trillion yuan, according to data from regulators. A total of 20 dealers and 79 international institutions have participated in these deals.

The bigger ambition behind Swap Connect, along with the Stock Connect and Bond Connect programmes, is to build a well-rounded ecosystem that facilitates cross-border investment activities on RMB-denominated assets.

This will drive the internationalization of the Chinese currency. It will also strengthen Hong Kong’s connectivity to the mainland, while enhancing its status as an international financial centre and the largest offshore RMB market.

Regulators issuing the Swap Connect notice include: Hong Kong Exchanges and Clearing Limited ( HKEX ), Securities and Futures Commission ( SFC ), the Hong Kong Monetary Authority ( HKMA ), and the People's Bank of China ( PBoC ).