China may allow yuan options trading to help banks and companies protect their earnings from swings in foreign-exchange rates, according to four people with knowledge of the plan.
The Chinese State Administration of Foreign Exchange, the nation’s currency regulator, has asked for some banks’ opinions on the issue, according to the people, who asked not to be identified because the plan hasn’t been announced. Trading may start in two months, two of the people said. Options give the buyer the right, not the obligation, to buy or sell the currency at a specific price on a specific date.
“There are very limited tools for companies to hedge against exchange-rate risks,” said Liu Dongliang (劉棟樑), a Shenzhen-based analyst at China Merchants Bank Co (招商銀行), the country’s sixth- largest lender by market value. “Currently they can only use either yuan settlements or forward contracts to protect themselves in international trade.”
Policy makers, seeking to curb the fastest inflation in two years, may allow the yuan to rise 6 percent by the end of next year, according to a Bloomberg survey of economists.
US Senate Foreign Relations Committee Chairman John Kerry said last week that the US Congress is “impatient” with the artificially low value of China’s yuan and may impose legislation “with teeth” next year.
The foreign-exchange regulator didn’t reply to three telephone calls and a fax seeking comment. An official at the China Foreign Exchange Trade System, which provides a platform for yuan trading, declined to comment.
Derivatives are agreements whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates.
Chinese authorities last allowed a new derivative to trade in the nation’s interbank market when approving currency swaps in 2007. The People’s Bank of China (中國人民銀行) has permitted the yuan to strengthen 2.5 percent against the US dollar since scrapping a two-year US dollar peg on June 19. The currency weakened 0.12 percent yesterday to 6.6634 yuan per US dollar.
Inflation accelerated to 5.1 percent last month, the fastest pace in 28 months, the Chinese statistics bureau said on Saturday. China’s trade surplus was a larger-than--expected US$22.9 billion last month, as exports rose 35 percent from a year earlier, the Chinese customs bureau said on Friday.
Yuan options are traded outside China between banks and the Chicago Mercantile Exchange, the biggest US futures market, began trading such contracts in August 2006.
One-month implied volatility on the yuan against the US dollar, a measure of exchange-rate swings used to price options, has risen to 3.90 percent, from 0.45 percent at the start of this year. The US dollar’s one-year, 25-delta risk--reversal rate against the yuan was a negative 0.4 percentage point, according to data compiled by Bloomberg. A negative reading indicates there’s more demand for yuan calls, or the right to buy the currency, than puts, or the option to sell the currency.
Chinese regulators have taken steps to help companies guard against risks in financial products after US credit-related derivatives triggered the global crisis.
Li Fuan (李伏安), head of banking innovation department of the China Banking Regulatory Commission, said China will “soon” publish new regulations on banks’ derivative businesses, the Shanghai Securities News reported on Nov. 19.