Bank of America expects that, should the band around the renminbi be widened, the onshore foreign exchange market will also be allowed. Gong believes a risk of renminbi devaluation is higher under the Bush administration. One of the key factors that prevented a renminbi devaluation during the Asian crisis, says Gong, is the joint intervention by the US and Japan to support the yen. However, Gong believes that the Bush administration is less interested in market intervention, let alone intervention for the renminbi's sake. The BOC offers renminbi forward contracts to onshore entities for current account-related hedging purposes.
Tenors are only up to six months.
Both foreign investment entities and local trade companies can do onshore hedging but there is no competition in terms of pricing. As the renminbi is not convertible under the capital account and foreign exchange, forward transactions are regarded as capital account transactions, a natural renminbi forward market does not exist. Gong recommends two strategies. Firstly, to hedge against the possibility of a wider renminbi band, Gong, advises taking long positionson HKD interest rates. If the renminbi is more volatile and trades weaker, the HKD Hibor premium over Libor should be higher, although the peg may still stay as the market demands a higher risk premium for the peg.