Renminbi deposits are growing at an extraordinary rate in Hong Kong, but the city's market for deliverable cross-currency swaps using the Chinese currency remains small and inefficient, say traders.

Standard Chartered Bank expected the level of RMB deposits in Hong Kong to stand at Rmb120 billion ($17.9 billion) by the end of September and Rmb200 billion by the end of 2010, from Rmb80 billion in June. 

"It is rising at about 15% each month, an extraordinary growth," says Tee Choon-Hong, Standard Chartered’s regional head of capital markets for North Asia.

Unsurprisingly, the volume of cross-currency swaps in the offshore renminbi market in Hong Kong is also growing at a rapid rate, although it comes from a low base.

Daily volume for non-trade foreign exchange of RMB in Hong Kong ranged between $2 and $10 million in July, when the People’s Bank of China and the Hong Kong Monetary Authority signed an agreement to expand an existing RMB trade settlement scheme. But that figure has since risen to about $150-$200 million, says Tee.

However, the size of the market is still relatively small and not yet efficient enough for swap-related new business to flourish, note traders. “Cross-currency swaps from RMB to US dollars or Hong Kong dollars are still expensive right now,” Tee adds.

Cross-currency swaps are derivatives largely based on expectations about interest rate differentials for each currency. Most US dollar-to-renminbi swaps are being carried out on the basis that the dollar is expected to fall and the RMB to rise. Therefore banks are selling US dollars and buying RMB in the offshore Chinese RMB market in Hong Kong.

The increasing use of RMB in Hong Kong is widely expected to spawn a burgeoning offshore RMB bond market in the city, providing good issuing opportunities for the right names, but as yet, supply is not close to keeping up with demand.

So far this year only two RMB bonds have been issued in Hong Kong: Hopewell Highway Infrastructure’s $203 million deal and McDonald’s $29 million issue, according to data provider Dealogic.

Meanwhile, Hong Kong-listed firms Shenzhen Expressway and Beijing Leader & Harvest Electric Technology have both issued RMB bonds in China this year, the largest of which was $58 million.

It compares with record RMB domestic bond issuance in China of $27.7 billion in the first three weeks of September, from $19.9 billion in August. Previously the highest monthly total was recorded last July at $25.7 billion.

Separately, last week BNP Paribas announced it had launched settlement and custody services for RMB-denominated bonds in Hong Kong, with the first trade settled on September 22.

Insurance firms such as Bank of China Life have also started offering policies in RMB in Hong Kong for the first time and will have RMB funds to invest in RMB bonds in Hong Kong.