Sun, Nov 05, 2006 - Page 11 News List

Finance official says China needs derivatives products

BLOOMBERG

China needs derivatives products, including a deepening forwards market, to help companies hedge against risks as the yuan appreciates against the US dollar, Chinese Vice Finance Minister Lou Jiwei (樓繼偉) said.

"We need products to hedge against risks," Lou told a conference in Beijing yesterday. "Yuan gains will have a certain risk for companies. We should have a yuan forwards market."

The yuan rose for a second week on speculation that the central bank will let the currency strengthen further to prevent exports from increasing China's record trade surplus and foreign-exchange reserves.

The yuan rose 0.23 percent for the week to close at 7.8716 against the US currency in Shanghai, according to the China Foreign Exchange Trade System.

Chinese officials have repeatedly said the yuan's exchange rate will be loosened only gradually because the nation's banks and companies aren't ready to cope with a free-floating currency.

The central bank on July 21 last year ended a decade-old link to the US dollar and let its currency move by up to 0.3 percent around a daily fixing rate.

China's State Administration of Foreign Exchange banned banks operating in the country from trading yuan derivatives in the offshore markets, according to a document dated Oct. 25 issued to lenders.

Foreign banks have been using offshore forwards to make bets on the yuan and avoid restrictions placed on onshore trades by the central bank. Domestic lenders have also been using the contracts, which are standardized and traded between global banks outside of an exchange. The document does not specifically refer to forwards trades or give a reason for the limits.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Yuan forward contracts are non-deliverable as they are settled in US dollars and not local currency.

Derivatives are financial instruments used to hedge risks or for speculation. They're derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives.

Lou's comments reiterated remarks from Su Ning (蘇寧), the central bank's deputy governor, who said on Oct. 21 that China will loosen foreign-exchange controls gradually and it should step up the development of financial tools to help banks and companies adapt to a more flexible currency system.

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