UPDATE 1-Hong Kong creates reference rate for offshore yuan markets

Thu Apr 25, 2013 11:19am BST

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* Hong Kong to add official interbank fix for offshore yuan

* Will improve hedging options, liquidity for yuan investors

* Addresses concern of corporates trading in yuan

* Removes other liquidity restrictions on banks, could increase CNH liquidity

By Pete Sweeney and Anne Marie Roantree

SHANGHAI/HONG KONG, April 25 (Reuters) - The Hong Kong Monetary Authority (HKMA) said on Thursday it would launch an interbank offered rate for the offshore yuan market (CNH) in June, a long-awaited move that will facilitate the creation of more hedging options for those investing or trading in the currency.

The decision to create a CNH HIBOR fixing would both support the development of the offshore yuan market and also enhance Hong Kong's competitiveness as a centre for offshore yuan business, Peter Pang, chairman of the executive board of the Treasury Markets Association in Hong Kong and deputy chief of the HKMA said in a news release.

The move will help address a widespread concern about a lack of hedging options that have restrained enthusiasm for holding offshore yuan. Beijing is trying to encourage increased global usage of yuan in trade to reduce foreign exchange risk and diminish its need to accumulate massive foreign currency reserves.

Even as the yuan-denominated debt or "dim sum" market has grown rapidly in recent months in response to growing demand from investors hungry for yuan assets, market players have had to resort to using imperfect derivatives to hedge their interest rate risk such as non-deliverable forwards and currency swaps.

Loan bankers said that while banks had previously relied on averaging rates offered by banks, or relied on the Bank of China Hong Kong's offered rate, the new fix would likely be more representative and generate more confidence.

"It's an extremely important step forward," said Robert Minikin, offshore yuan strategist at Standard Chartered in Hong Kong.

"The conditions had been in place for this development for the last couple of years so it's great that it's finally being put into place, and obviously it will allow the creation of a whole range of derivative markets."

However, given concerns over rate-rigging scandals with interbank reference rates in other markets, Frances Cheung, forex strategist at Credit Agricole CIB in Hong Kong, questioned how important the new CNH HIBOR fix will ultimately prove to be.

"The issue remains as to whether an interbank rate is the best money market benchmark, especially upon a slew of probes globally into interbank rate quotes," she wrote in a note to clients.

She pointed out that Singapore is considering dropping its interbank offered rate, while China itself has been relying mostly on an unofficial benchmark rate based on the seven-day bond repurchase agreement contract than on its putative interbank offered rate, known as the SHIBOR.

In addition to implementing the HIBOR fix, HKMA also said it will eliminate the net open position rule and the 25 percent liquidity requirement, putting CNH on the same status as other currencies when it comes to calculating the statutory liquidity ratio for banks.

The changes mean that banks can now treat CNH deposits on an equal footing with other kinds of currency deposits, instead of having to hoard additional reserves of CNH in cash. This is expected to release more CNH into the interbank system, improving liquidity.

Beijing has stepped up efforts to make the yuan more widely accepted by global investors and companies, aiming to make its currency fully convertible in the coming years and on a par with the dollar.