Dealers are expecting a domestic interest-rate swap market to emerge next year on the mainland. The move is anticipated because of the continued liberalization in China, which for instance has recently opened the fx forwards market to foreign houses (DW, 9/16). Following initial transactions by domestic banks that need approval on a case-by-case basis, foreign dealers are hopeful that a real market will be in the cards for next year. Recent transactions have included last month's 10-year CNY5 billion (USD618 million) swap between China Everbright Bank and China Development Bank.
HSBC, an old hand in the Chinese market, and other players including UBS and Standard Chartered are talking to local players in preparation for the market taking off. David Liao, treasurer at HSBC in Shanghai, said the firm is looking to build an interest-rate swap business focusing on risk management for corporates and financial institutions. Liao explained a market should emerge in the next year, as the concept of risk management gains more ground and Chinese regulators move toward further openness. Interest-rate exposure is predominantly based on loans and deposit rates and end users are lobbying to better manage their local currency risks.
One of the major issues facing market participants is deciding the benchmark reference rate for such transactions. "It's a matter of the market finding an appropriate fixing benchmark--participants will need to have a good look at the type of risk they are exposed to [in order] to determine what they need to hedge against," said Liao. Market participants are discussing using fixed versus the Peoples' Bank of China lending rate, or the deposit rate, seven-day repo fixing or CHIBOR. The initial forays by domestic banks have been fixed versus deposit rates, but Liao noted supply and demand will steer the direction of the market's development.
