Tue, Aug 21, 2007 - Page 11 News List

Forwards traders bet on yuan swaps

BLOOMBERG

Yuan forwards traders raised bets that the currency will rise faster after China's central bank said it will start swaps trading in the interbank foreign exchange market.

China will allow yuan swaps against the US dollar, euro, yen, Hong Kong dollar and British pound, the central bank said yesterday. Some investors may use the derivatives to bet on further gains in the Chinese currency, said Jin Di, a trader at Bank of China's (中國銀行) branch.

"The swaps will provide investors with more avenues to participate in betting on the yuan," Shanghai-based Jin said. "There may have been stronger expectations of yuan appreciation today."

So-called non-deliverable forwards climbed the most since the end of a dollar link in July 2005. The currency may advance 5.3 percent over the next 12 months, according to the implied forward rate of 7.2075 as of 5:30pm. in Shanghai. Investors had speculated that the currency would reach 7.2485 in the same period last Friday.

Yuan swaps are introduced to help companies hedge their foreign-exchange risk, the People's Bank of China said. Chinese companies need more derivatives instruments as China seeks to increase currency flexibility. The yuan's 9.1 percent appreciation since the end of the fixed exchange rate increases export prices and lowers import costs.

A currency swap is an exchange by two borrowers with opposing needs of a certain amount of currencies through a lender. The transaction, which is an agreement between the two parties to exchange future payments in one currency for payments in another, aims to reduce the cost of financing that companies must face.

"China is now allowing the interbank swaps trading as opposed to letting some commercial banks trade the swaps for their customers," said Zhao Qingming, an analyst at China Construction Bank Corp(中國建設銀行), China's third-largest lender based in Beijing.

The yuan rose 0.11 percent to 7.5871 against the dollar in Shanghai trading yesterday.

Government bonds were little changed before new issues in the primary market this week.

China Development Bank (國家開發銀行) sold 15 billion yuan (US$2 billion) in one-year notes at a yield of 3.25 percent. The auction drew 24.3 billion yuan of bids. The yield on the similar-maturity security sold by the bank was 3.27 percent on the secondary market.

"The secondary market is very stable," said Wang Weiwei, a bond analyst with Bank of China trading center in Shanghai. "Demand for primary-market issues is quite strong."

The Ministry of Finance will sell 28 billion yuan of fixed rate bonds tomorrow that mature in 2014. The coupon rate is to be auctioned.

"Trading is very thin in the exchanges market today with a little increase in the prices," said Feng Chen, a fixed-income analyst with Galaxy Securities Co (中國銀河證券), which is the nation's biggest securities brokerage by assets.

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