Once again, Crédit Agricole has demonstrated a commitment to Hong Kong’s financial market infrastructure that goes beyond simply meeting the needs of its customers, this time by playing a central role in kick-starting the CNH repo market: an essential tool for cross-border trade in derivatives with the continent to take off.
“We are very committed to building better market infrastructure for our customers, other banks and regulators,” said John Luk, head of emerging markets in Hong Kong. “Hong Kong has positioned itself as a key center for renminbi risk management. We need better infrastructure to further develop the market and create new opportunities.
In July, Hong Kong Exchanges and Clearing (HKEX) announced that it was working in partnership with the China Foreign Exchange Trade System and the Shanghai Clearing House to develop a mutual access program to interbank interest rate swap markets.
This initiative, known as Swap Connect, should be launched by the end of the year. Ability to achieve stability CNH funding will be critical to its success.
“Before, the only way to get CNH financing was done via currency swaps or using CNH deposits,” says Gary Lo, head of China offshore trade at the bank. “However, the foreign exchange market is very volatile and depends on where you borrow the dollar, while the CNH the deposit market is quite illiquid.
This is why, in February, Crédit Agricole joined forces with the Hong Kong branch of Bank of China to launch the first CNH repo, using Chinese government bonds (CGBs) and bonds issued by the People’s Bank of China (BPoC).
“It’s a very important trade because it provides a much more stable way to access CNH funding,” says Lo.
Credit Agricole not only pioneered this trade, but also actively promoted wider use of the product among financial institutions in Hong Kong, to bring more liquidity to the market.
“With BPoC bills repo market becoming more active, we expect improvement CNH market stability funding,” says Lo. “The Swap Connect program will soon be launched [and] a wishlist is to be able to use BPoC invoices in guarantee with the HKEX. If possible, it would reduce banks’ funding costs and increase the attractiveness of holding BPoC charges as an asset.
Open the way
This repurchase transaction is just one example in a long series that demonstrates the French bank’s long-term commitment to Hong Kong.
For example, Crédit Agricole is very proud to be able to contribute to the development of the bond market and, as one of the best arrangers of bonds denominated in Hong Kong dollars over the past four years (both in terms of number of issues and size notional), it is well placed to do so.
Between 2018 and 2022, Crédit Agricole participated in the arrangement of 306 bond issues, for a total notional amount of hong kong$108.2 billion ($13.8 billion), making it the instrument’s second arranger after HSBC. If we consider the allocation period alone – between June 2021 and June 2022 – Crédit Agricole participated in the arrangement of 85 bond issues in the amount of hong kong$22.5 billion.
Last September, Crédit Agricole was appointed Designated Market Maker for Southbound Bond Connect. Only 12 other banks were on the list: three from Europe, two from America and the others from China or Japan.
Another historic moment came in May this year, when Crédit Agricole participated in the primary auction of Hong Kong’s first-ever 20-year government bond.
Hong Kong suffers from a lack of high-quality, long-term HK dollar-denominated bonds, despite growing demand for such assets from pension funds and life insurers. The 20-year issue aims to promote the development of the Hong Kong bond market by lengthening the yield curve and providing a market benchmark for long-term issues.
Only the primary dealers of the Hong Kong Government Bond program – 10 in number – can participate in the primary auctions.
Crédit Agricole has also been very active in recent years to support Hong Kong in the transition from the Hong Kong Interbank Offered Rate (Hibor) to the alternative benchmark rate of the Hong Kong Dollar Overnight Index Average (Honia).
In November, the bank participated in the primary auction of the very first floating rate note linked to this new benchmark.
“Crédit Agricole is very active in the Hong Kong dollar bond market and we always want to be at the forefront of innovation. This is how we can ensure that we bring the most value to customers,” says Lo. “We are constantly striving to build a better platform for the market and improve access to assets. In this way, we can help our clients better manage their risks.
Crédit Agricole’s efforts have certainly resonated well with customers.
The treasury manager of the Hong Kong branch of a Chinese bank says: “Credit Agricole has an excellent business behind it. If I ask them for hedging, especially in currency and interest rate swaps, they can quote me a very narrow spread. This is very important for my bank because the size of our transactions can be huge.
In addition, specifies the head of treasury, the bank has excellent liquidity lines BPoC – and this is important for this particular bank because even when the offshore CNH market is under pressure, Crédit Agricole can still offer attractive renminbi transactions.
It is this ease with which Crédit Agricole straddles two worlds, the markets of Europe and WE on one side and those of northern Asia on the other, which gives the French bank such an advantage against Hong Kong.