When the Hong Kong stock exchange launched five-year China government bond futures on August 3, it did more than simply expand the city’s derivatives product suite.
As the only China government bond futures in the offshore market, the contract deserves attention as it finally gives international investors an exchange-traded tool to hedge against yuan interest rate exposure, strengthening Hong Kong’s ability to price yuan assets, manage risk and serve global investors.
The launch comes as the international monetary system is becoming more diverse. International use of the yuan is gradually expanding beyond trade settlement to investment, financing, pricing and reserve management. Meanwhile, heightened geopolitical tensions and volatile government bond yields in major developed markets have prompted investors to seek greater diversification and portfolio resilience. These dynamics strengthen the case for yuan-denominated financing and investment.
Chinese government bonds, which have a low correlation with many overseas assets, offer diversification. Central banks and sovereign wealth funds continue to use them to diversify their reserve holdings, while insurers, pension funds and global asset managers are gradually increasing their participation.
From June 2017 to May this year, global holdings of Chinese interbank bonds increased from 800 billion yuan to 3.2 trillion yuan (US$474 billion), of which about 2 trillion yuan was invested in Chinese government bonds.
A global currency needs more than a large pool of investible assets. It also needs reliable pricing benchmarks, liquid secondary markets and efficient risk-management tools that allow investors to enter and exit positions efficiently and pursue different investment and hedging strategies.
