China accounting rules hit interest rate hedging demand

Failure to apply hedge accounting means derivatives bring balance sheet volatility and consequently a lack of interest from firms

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The failure to recognise the risk mitigating nature of derivatives in Chinese accounting standards is deterring local market players from trading renminbi interest rate swaps (IRS), despite a series of moves by the People's Bank of China to liberalise interest rates and therefore make hedging more attractive.

Renminbi IRS were first traded onshore in China in 2006 and while the sector has developed quickly in a relative sense – with total notional volumes hitting 2.6 trillion yuan ($425 billion)

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