The year 2024 marks the 30th anniversary of the establishment of the China Foreign Exchange Trade System (CFETS) (National Interbank Funding Center). As an important infrastructure of the mainland financial market, the China Foreign Exchange Trade System (hereinafter referred to as the "CFETS") plays a vital role in the opening up of the mainland financial market.
As a member of the 14th National Committee of the Chinese People's Political Consultative Conference (CPPCC), Huo Yingli, Secretary of the Party Committee of CFETS, recently accepted an exclusive interview with the reporter of the 21st Century Business Herald, focusing on how the interbank market has achieved leapfrog development in the past 30 years, how the "Northbound Swap Connect" has been operating since its launch, and how to steadily and steadily promote the internationalization of the RMB and other hot topics of market concern.
Huo Yingli. Data map
The average daily transaction in the interbank market exceeded 10 trillion yuan
21st Century: 2024 is the 30th anniversary of the establishment of the foreign exchange trading center, can you summarize the main achievements of the development of the interbank market in the past 30 years with a few key words?
Huo Yingli: Looking back, in the past 30 years, the efforts made by CFETS to promote the high-quality development of the interbank market, serve the implementation and transmission of the central bank's monetary policy, and help the reform and opening up of the financial market can be summarized in four key words.
The first is to promote reform: The interbank market provides a solid market foundation for the market-oriented reform of exchange rates and interest rates. Since 1994, the RMB exchange rate formation mechanism has been moving towards an increasingly market-oriented direction, and a managed floating exchange rate system has been gradually formed based on market supply and demand, adjusted with reference to a basket of currencies. The interbank foreign exchange market, which was born in the same year, is also maturing, the product series is becoming more and more perfect, the market members are constantly enriched, the market depth is gradually improving, and the market resilience is significantly enhanced. With the continuous deepening of the market-oriented reform of interest rates, the interbank money market and the bond market have become an important part of the formation and transmission mechanism of market-oriented interest rates in the mainland, regulating the supply and demand of funds and the allocation of resources, and supporting the realization of monetary policy goals. In 2013 and 2016, the self-discipline mechanism for market interest rate pricing and the self-discipline mechanism for the foreign exchange market were established successively, playing an active role in market self-discipline and standardized development.
The second is innovation: the interbank market has always adhered to the guidance of innovation, and the trading varieties have been continuously expanded, and the trading mechanism has continued to evolve. The product system has gradually expanded from only two spot trading varieties of RMB against US dollars and RMB against Hong Kong dollars to spot and derivative products such as the interbank foreign exchange market, money market and bond market. The service sequence gradually covers issuance, trading, post-trade processing, information, benchmarking, data and investor education, and has the full life cycle service capability from financial transaction to payment and settlement support. The interbank market has also innovatively launched various trading methods suitable for different trading varieties and different market entities, such as bidding, matchmaking, inquiry, and request for quotation, to meet the diversified trading needs of the market and improve the market price discovery function. The scale of the interbank market has also increased from more than 300 billion yuan in 1994 to more than 2,500 trillion yuan in 2023, and the average daily transaction size exceeded 10 trillion yuan last year.
The third is risk prevention: The interbank market has always regarded the prevention and control of financial risks as the eternal theme of its work. Since its establishment, the trading center has adopted the electronic trading platform carrier to form a centralized, unified and organized over-the-counter market form, which has not only withstood the impact of the two rounds of financial crises at the end of the 20th century and the beginning of this century, but also coincided with the evolution trend of the international financial market model after the financial crisis in 2008. In 2018 and 2021, the two core systems of foreign exchange and local currency completed the latest overall upgrade, basically realizing the autonomy and controllability of the core systems. Since 2012, the interbank market has also established a relatively complete post-trade business system, which helps improve the efficiency of transaction and payment processing and reduce the risk of market operation and operation. The integration advantages of the unified platform and the electronic monitoring system effectively ensure the real-time and integrity of market information, and become a sensitive "tentacle" for the financial management department to monitor the market in depth, providing important support for maintaining the stability of the financial market and preventing systemic financial risks.
Fourth, we need to open up to the outside world: The interbank market has always adhered to a high level of opening up. Since 2010, when the PBOC allowed three types of overseas institutions to invest in the interbank bond market on a pilot basis, CFETS has combined its independent model with international cooperation, successively launched two channels of "settlement agency model" and "bond connect" trading services for overseas institutions, continuously deepened the interconnection with domestic and foreign infrastructure, and launched mechanisms such as trading sub-position, special settlement cycle, international payment mode and closing price trading based on international market rules, so as to continuously improve the experience of foreign institutions investing in and trading China's bond market. At the same time, the opening up of the interbank foreign exchange market is also steadily advancing, which facilitates overseas institutions to carry out capital exchange and exchange rate risk management. In addition, in 2021, the Southbound Trading of Bond Connect was launched, providing efficient and convenient services for domestic institutions to invest and trade global bonds. In 2023, Swap Connect will be officially launched, providing more effective and convenient support for foreign investors to carry out interest rate risk management.
Swap Connect transaction sizes and participants will continue to increase
21st Century: In May 2023, the Northbound Swap Connect was officially launched, adding another powerful tool to foreign investors' interest rate risk management tools. Over the past six months, how has the Northbound Swap Connect been performing, and what room is there for optimization in the future?
Fok Yingli: On 5 May 2023, the People's Bank of China, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a joint announcement on the "Swap Connect" business, announcing the official launch of the "Swap Connect" business on 15 May. Since the official launch of the "Swap Connect", domestic and foreign market institutions have actively carried out transactions, and the market has responded enthusiastically. As of the end of 2023, a total of 51 overseas institutions have participated in the market, and 20 domestic swap service providers have provided quotations for overseas institutions, with a cumulative notional principal of nearly 1 trillion yuan. There are various types of investors, including overseas central banks, overseas commercial banks, overseas securities companies and offshore funds. There are a wide variety of trading targets, including FR007, Shibor3M, ShiborO/N, with a term covering 1 month to 5 years, and the reference rate of the main trading target is FR007 with a term of 1 year or less.
On the basis of adhering to the current development path of the inter-bank derivatives market, the "Swap Connect" fully draws on the mature experience and overall framework of the opening up of the bond market, and conveniently completes RMB interest rate swap transactions and centralized clearing without changing trading habits and effectively complying with the laws and regulations of the two markets, so as to reduce the difficulty and complexity of domestic and foreign investors' participation and better meet the needs of foreign investors for interest rate risk management.
As the demand for RMB interest rate risk management continues to increase by foreign investors, it is expected that the size of Swap Connect transactions and the number of participants will continue to increase in the future. In the next step, CFETS will continue to cooperate with other financial infrastructures to continuously improve the infrastructure level and service level of "based on China and serving the world", continuously enrich the product range, optimize the arrangement of the "Swap Connect" transaction clearing mechanism, and promote the sustainable and steady development of the "Swap Connect" business.
Strengthen the financial infrastructure and support the development of financial centers in the two places
"21st Century": The Central Financial Work Conference proposed to "enhance the competitiveness and influence of Shanghai as an international financial center, and consolidate and enhance Hong Kong's status as an international financial center". What will the CFETS focus on in the future to continue to support the development of financial centers in the two places?
Huo Yingli: Over the past 30 years, CFETS has been based in Shanghai, giving full play to its policy and location advantages, continuously deepening the high-level opening up of the interbank market, and serving the construction of Shanghai as an international financial center. At the same time, we will actively promote the interconnection of domestic and foreign financial markets, smooth channels and improve mechanisms, so as to support the prosperity and development of Hong Kong as an international financial center.
In the future, CFETS will continue to improve the supply of financial services and contribute to the construction of Shanghai as an international financial center. Specifically, we will continue to study and explore the pilot project of RMB foreign exchange futures trading, actively implement the strategy of building Pudong as a "leading area", increase the service intensity of major strategies and key areas, enrich the index system, actively innovate in regional coordinated development and green financial products, and promote Shanghai to build an international green finance hub, and study and explore the provision of RMB foreign exchange trading services in the Shanghai Free Trade Zone to promote the coordinated development of onshore and offshore markets.
The CFETS will deepen the two-way opening up of the financial market and support the consolidation and enhancement of Hong Kong's status as an international financial centre. We will continue to improve the system of opening up the interbank market to the outside world, explore the opening up of the interbank bond repurchase business, and further facilitate foreign institutional investors to carry out RMB liquidity management. Enhance the Swap Connect and Bond Connect, enrich and smooth the channels for opening up to the outside world, and enhance the convenience for foreign investors to participate. Progressively enhance the mechanism arrangements for the Southbound Trading of Bond Connect and promote it to become the main channel for domestic institutions to invest in the global bond market.
Build a stable, efficient and smooth RMB investment and financing environment
21st Century: A strong currency is a key core element in building a financial power, and to do so, it is necessary to promote the internationalization of the renminbi and strengthen its position in the global financial system. What role can Trading Central play in this?
Huo Yingli: The Central Financial Work Conference put forward the goal of building a financial power, in which a strong currency is one of the important elements. This means that the renminbi should be widely used in international trade, investment and foreign exchange markets, and at the same time have the status of an international reserve currency. At present, the indicators of RMB internationalization are generally improving, and RMB has become the world's sixth largest reserve currency, the fourth largest payment currency, the third largest trade finance currency and the fifth largest trading currency. The high-level opening up of the financial market to the outside world has provided a stable, efficient and smooth RMB investment and financing environment for overseas entities, making the RMB and RMB assets more and more widely traded and held by international investors, which is a significant sign of the continuous strength of the RMB.
At the same time, we should also be soberly aware that the degree of internationalization of the renminbi is still low, and there is still a big gap between the internationalization of the renminbi and the goal of becoming a financial power. Deepening financial reform, speeding up the establishment and improvement of a market-oriented modern financial system, and enhancing the development and openness of the financial market are important foundations for the renminbi to become a "strong currency".
As the forefront of China's financial market opening up, the interbank market has become the main place for foreign institutions to participate in the domestic financial market, and the "quality" of internationalization has been continuously improved. By the end of 2023, there were 1,124 overseas legal entities in the interbank bond market, and 80 of the world's top 100 asset management companies had entered China's bond market, becoming an important force in RMB asset allocation. Before 2018, 87% of transactions were concentrated in overseas banks and central banks, and the proportion of non-sovereign and non-bank financial institutions such as overseas securities, insurance and funds has risen to nearly 30%. In addition to major products such as treasury bonds, policy financial bonds, and interbank certificates of deposit, the trading volume and holdings of local bonds, short-term financing bonds, medium-term notes, asset-backed securities, etc., have also increased, and green bonds and other types have gradually been recognized by overseas institutions.
With the strengthening of the linkage effect of investment and exchange in the interbank market, the trading activity and market share of foreign institutions in the interbank RMB foreign exchange market continued to increase. In 2023, foreign institutions will have a cumulative turnover of US$1.5 trillion in the interbank RMB foreign exchange market, a year-on-year increase of 31.3%, accounting for 2.4% of the total market trading volume, breaking the 2% mark for the first time. In 2023, Swap Connect provides a more convenient channel for overseas institutions to manage interest rate risks, further enhancing the convenience for foreign institutions to invest and manage RMB assets.
Since the Belt and Road Initiative was proposed in 2013, CFETS has continued to focus on providing better Belt and Road currency transaction and settlement services for the market. At the end of 2023, 17 of the 30 currencies listed in the interbank foreign exchange market were leading the way, and the trading volume of the leading currencies in the interbank RMB foreign exchange market in 2023 was about 57.5 billion yuan, a year-on-year increase of 29%. Overall, the size of the Belt and Road currency transactions is still low, accounting for only 0.03% of the trading volume of the interbank RMB foreign exchange market in the same period. CFETS will continue to study and improve RMB and Belt and Road currency trading services, improve the liquidity of the listed currency market, and support the listing and trading of more currencies of the Belt and Road countries.
In the future, CFETS will continue to unswervingly build a safe, standardized, transparent, efficient, dynamic and resilient interbank market, solidly promote the institutional opening of the market, continue to promote the interconnection of domestic and foreign financial infrastructure, continuously enhance the internationalization of the domestic financial market, serve the internationalization of the RMB with high-quality market development and high-level opening-up, and promote the RMB to become a strong currency.
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