Companies in Hong Kong moved swiftly on Monday to take advantage of a new Swap Connect rule that lets them hedge using China's onshore loan prime rate (LPR), as demand rises to manage yuan interest-rate risks.

The measure, which was introduced by mainland China and Hong Kong regulators in May and went live on Monday, is part of a drive to expand product offerings under Swap Connect. Launched in Hong Kong in 2023, Swap Connect allows global investors to access mainland China's interbank financial derivatives market to hedge interest-rate risks.

The introduction of the one-year LPR as a floating reference-rate option provides a benchmark more closely aligned with mainland China's lending market, helping offshore corporate treasuries manage yuan exposures. The rate is most commonly used in pricing corporate and household loans. The other reference rates Swap Connect supports are the seven-day repo and the three-month and overnight Shanghai interbank offered rates.

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"[Yuan]-based assets and liabilities remain one of our core focuses," said Andrew Fung, executive director and chief financial officer of Henderson Land, which tapped HSBC to complete an LPR-based interest-rate swap, according to the bank's press release on Monday. The tool allowed the developer to optimise interest-rate risk management for yuan liabilities, he added.

"Global [companies] are increasingly seeking effective offshore solutions to manage their RMB interest-rate risks," said Cheuk Wong, HSBC's Asia head of foreign exchange, emerging-market rates and commodities and Hong Kong head of markets and securities services.

The latest Swap Connect enhancement allows banks in Hong Kong to offer yuan interest-rate hedging tools based on a benchmark for most onshore corporate and household loans.

"This is set to further boost the utilisation of the city's robust offshore [yuan] market by global businesses," Wong said.

Standard Chartered Bank (Hong Kong) assisted financial institutions, including Bank of Communications and Orient Securities, to settle Swap Connect transactions using the one-year LPR for the first time, it said in a statement on Monday. The latest measure would allow offshore investors to manage yuan interest-rate risks "more flexibly and effectively, attracting more international investors to access the mainland capital market and further accelerating the internationalisation of the [yuan]", said John Thang, Standard Chartered's head of markets and strategic client management and solutions for Hong Kong, Greater China and North Asia.

Mainland China and Hong Kong have continued to open up China's interbank financial derivatives market, leveraging the city's role as the biggest offshore yuan hub.

An employee uses a machine to count Chinese 100 yuan banknotes in Hong Kong. Photo: Bloomberg alt=An employee uses a machine to count Chinese 100 yuan banknotes in Hong Kong. Photo: Bloomberg>

In July, a People's Bank of China official said authorities were evaluating a more dynamic management mechanism for dealers, a bigger team of Swap Connect dealers and higher daily trading limits. The northbound Swap Connect currently has 20 dealers and a daily trading quota of 20 billion yuan (US$2.8 billion) on net notional principal amounts.

On top of the expansion of reference-rate options, the enhancements proposed in May also included extending the maximum tenor of interest-rate swap contracts from 10 years to 30 years. In January, northbound Swap Connect transactions began accepting Chinese government bonds and policy bank bonds as collateral.

Investors in the offshore bond market "could welcome the maximum of interest rates swap contracts" as offshore yuan bond issuance becomes more active, said Christopher Li, head of Asia credit trading desk analysts at BNP Paribas.

"We see a rise in demand for various interest-rate tools from credit investors to best match their investment needs," he said. "One of these is hedging tools to mitigate volatilities arising from long-end [China government bond] yield movements."

Transaction volume on the northbound Swap Connect rose 34.5 per cent to 419.68 billion yuan in August from a year earlier, according to the latest official data. Approved institutional investors in the programme also grew to 82 from 64 during the period.

The enhancements "have transformed Swap Connect" from a programme that primarily supported institutional investors hedging bond and investment portfolios to one that also helped companies better manage interest-rate risks on offshore loans, according to HSBC.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2025 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2025. South China Morning Post Publishers Ltd. All rights reserved.