Yuan Money Market Expands in Hong Kong as JPMorgan, ICBC Enter

Yuan money markets are expanding in Hong Kong as more banks quote interbank interest rates for the currency, helping widen its use for trade and investment beyond China’s borders.

JPMorgan Chase & Co. (JPM), ICBC (Asia) Ltd., Bank of Communications (Hong Kong) Ltd., Bank of East Asia Ltd. and Bank of Tokyo-Mitsubishi UFJ Ltd. started providing interbank rates for yuan in Hong Kong today, according to Jack Cheung, chief executive officer of the city’s Treasury Markets Association. That brings to eight the number of lenders quoting prices. Bank of Tokyo-Mitsubishi and Citigroup Inc. completed the first yuan interest-rate swap involving the Hong Kong interbank rate.

“It’s a breakthrough,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “In order for the market to fully develop, you do need a swap curve. This will allow more financial instruments like hedging for Dim Sum bonds and benchmarks for loans to develop in the offshore yuan market.”

The need for benchmark lending rates in Hong Kong’s offshore center for yuan is building as companies increasingly turn to the city to obtain financing in China’s currency. The city’s outstanding yuan-denominated loans totaled 30.8 billion yuan ($4.9 billion) at the end of 2011, up from 1.8 billion yuan at the start of the year, Hong Kong Monetary Authority data show.

Sales of yuan-denominated bonds in Hong Kong, known as Dim Sum bonds, almost tripled to 50.7 billion yuan in the first quarter of this year from 18.6 billion yuan a year earlier, according to data compiled by Bloomberg.

‘Reputable Rate’

BOC Hong Kong (Holdings) Ltd., Standard Chartered Plc (STAN) and HSBC Holdings Plc (HSBA) have been quoting interbank rates for offshore yuan since January, though there’s no official daily fixing as yet.

“Our committee is aware of the market expectations and the need for an offshore interbank fixing,” TMA’s Cheung said in a phone interview. “We want to make sure it’s a reputable rate before we post it up.”

Bank of Tokyo-Mitsubishi and Citigroup Inc. agreed a one- year interest-rate swap involving 100 million yuan, according to two people with direct knowledge of the matter. Under the terms reached, the Japanese lender will pay 2.45 percent in exchange for the three-month interbank offered rate, which will be set quarterly. Spokesmen at the banks declined to comment.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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