Hong Kong-based financial institutions could well benefit from the re-appearance of currency swaps arranged mainly through state banks in order to steady trade regional currencies.

In recent months, the Chinese mainland has completed currency swap deals with Indonesia, South Korea and Hong Kong, aiming to counter the effects of gyrations in the US dollar´s value against major currencies and ease trade relations.

Observers say that while the effects of the China-issued instruments will have little direct impact on the foreign exchange markets themselves, they´ll help to stabilise longer term positions and capture favourable interest rate differentials.

As the Mainland has yet to arrange full convertibility of the Renminbi, existing rules do not cover interest rate swaps, so that approved Mainland banks can enter into Renminbi/foreign currency swaps with an initial and final exchange but without any interim exchange of interest.

Usually, parties agree in a currency swap to a series of interim interest payments on initial cashflows until the maturity of the swap, when principal and interest are exchanged in full.

Indonesia secured nearly US$15 billion in a currency swap instrument with China to allow Southeast Asia´s top economy to weather emerging market selloffs and the maturing of a large chunk of corporate debt.

The swap is the equivalent to around a third of Indonesia´s current currency reserves of US$54 billion.

"This swap arrangement will add ammunition for Bank Indonesia to help it defend the rupiah," said Eric Sugandi, an Economist at Standard Chartered Bank in Jakarta.

The rupiah , which has fallen about 5% this year on a general selloff in emerging markets and amid concerns over corporate debt, jumped more than 1% to Rp11.5 to the US dollar after the swap.

People´s Bank of China (PBOC) announced the swap deal would total Rmb100 billion or Rp175 trillion, the fifth such bilateral arrangement that the Chinese central bank has announced since late last year.

Like the yuan swaps it has already agreed with South Korea, Malaysia and Hong Kong the agreement with Indonesia may be extended, the PBOC said.

A total of US$22.6 billion of Indonesian companies´ foreign debts are due this year of which US$17.4 billion is debt-denominated in foreign currencies with maturity of up to one year and US$5.2 billion in trade financing according to Indonesia´s central bank.

China´s swap arrangement with Jakarta is also designed to support bilateral trade and direct investment in order to help boost economic growth and provide short-term liquidity to stabilise the financial market.

Indonesia is a global exporter of resources such as copper, coal, palm oil and nickel, with China´s fast-growing economy being a major destination for its raw materials.

Craig Chan, Currency Strategist at Nomura in Singapore is maintaining a bullish outlook on the rupiah and dismissed worries about the debt overhang on the currency.

Indonesian President Susilo Bambang Yudhoyono has set a Rp73.3 trillion stimulus package to create jobs and lift economic growth this year.

Daniel Hui, Currency Strategist at HSBC in Hong Kong said the swap between the yuan and the rupiah would only be of limited use in view of the fact that the Renminbi is not convertible.

Economists believe China is likely to rely increasingly on bilateral swaps as those lines are largely linked to conditions set by the International Monetary Fund.

from Sarayuth Chewarouengroj, Bangkok Office