The introduction of a Hong Kong dollar interest rate futures contract later this year may not be enough to rejuvenate the Hong Kong Futures Exchange in face of other negative influences, according to anlaysts here.

Any revival is threatened by Hong Kong's sluggish capital market, structural challenges posed by the banking system and a loss of confidence in the exchange since the October stock market crash.Exchange officials have said the three-month Hong Kong dollar interest rate contract is one of several new instruments that will be offered to widen the investor and member base of the exchange.

The contract will be introduced in July if approved by the Commodities Trading Commission, the exchange said in a proposal in the HKFE's latest quarterly bulletin, due for publication later this week.

Analysts welcomed the proposal, which had been planned for December but was shelved following the October stock market crash.

Specifications for the contract differ little from the original proposal, except that the proposed contract will trade only March, June, September and

December, to allow investors to hedge continually without the exposure created

from trading consecutive months with different numbered days.

The new instrument is likely to be a much more effective mechanism than the original draft, said one futures analyst.

This will definitely be a value to large firms, especially if the capital market picks up, he said.

But Hong Kong's questionable ability to attract more liquidity may be a handicap for the new contract, analysts said. And that liquidity in turn hinges on the health of overseas institutions that traditionally have been the source of incoming funds, they said.

It may not generate enough interest for it to mature, said Edward Leung, chief economist at the Bank of East Asia.

The potential ability of Hong Kong's monolithic banking network to influence rates also may dog the contract's development, analysts said.

Some banks, like the Hong Kong and Shanghai Bank and Bank of China, have a virtual monopoly on interest rates because they have a large piece of local deposits, said an analyst at one of Hong Kong's largest banks. They therefore have a big interest on the interbank market rate.

But other analysts doubted Hong Kong's major banks would abuse a contract offering effective hedging to large institutions.

The potential for manipulation exists, said the futures analyst. But it is doubtful. The Hong Kong and Shanghai bank would not fiddle around with the rates to make money. That would be an inefficient market.

But given Hong Kong's turbulent post-crash legacy that included the arrest of several senior Hong Kong Stock Exchange officials, potential investors in a new Hong Kong futures contract would need to be assured that the colony's investment climate is sound.

The HKFE is still reeling from defaults totaling HK$1.8 billion, despite a repayment package announced last week that would restore about 60 cents on each dollar of default.

The big problem is the fact that they defaulted, said the futures specialist. A lot of people are out there saying 'Why do we want to get mixed up in this?' But if they set it up right, it should be OK.