China plans to speed up
development of derivatives to help companies and financial institutions hedge
risks as the country moves toward a more market-oriented exchange rate system,
banking regulators said Wednesday.
The loosening of the yuan's decade- old peg to the dollar last year has led
to a "significant increase" in foreign currency risks, Zhang Guangping, deputy
director general of the China Banking Regulatory Commission, said in a speech in
Shanghai.
The Shanghai-based foreign-exchange interbank market should "accelerate the
pace of development of China's derivatives market," central bank Vice Governor
Xiang Junbo said. The officials spoke at a ceremony to mark an agreement with
the Chicago Mercantile Exchange that gives Chinese institutions and investors
electronic access to currency and interest- rate products.
China on July 21 allowed the yuan's value to rise for the first time in a
decade, revaluing the currency by 2.1 percent against the dollar and linking its
value to a broader basket of currencies including the euro and yen. China's
Premier Wen Jiabao last month pledged to make the exchange rate more flexible.
A derivative is a financial obligation whose value is derived from interest
rates, the outcome of specific events, or the price of underlying assets such as
debt, equities and commodities.
The central bank has taken a series of steps to expand the derivatives
market, announcing in August that it would let more than 130 domestic and
foreign banks trade yuan forward contracts and swaps on behalf of clients.
Citigroup and HSBC Holdings are among foreign banks that have received licenses
to trade yuan forwards.
Forwards are agreements in which assets are bought and sold at current prices
for delivery at a later specified date. Futures, another type of derivative, are
exchange-traded agreements to buy or sell an asset at a set time and price.
Under the agreement with the Merc, the China Foreign Exchange Trade System,
or CFETS, will act as a clearing member for investors in China to trade futures,
according to an announcement by the biggest U.S. futures exchange on March 10.
The Merc agreement follows a June 2004 memorandum of understanding in which
the U.S. exchange agreed to provide assistance to China in developing a
derivatives market.
Regulators are considering expanding the market for swap products, Li
Dongrong, deputy director of the State Administration for Foreign Exchange, said
at the ceremony.
China's central bank said in February it conducted a $6 billion one-year
currency swap on Nov. 25 with China Development Bank and nine other domestic
lenders, the first such transaction.
China Development Bank and China Everbright Bank completed the nation's first
interest rate swap, agreeing to exchange the risk on 5 billion yuan, or $617
million, of principal, Xinhua reported on Feb. 10.