China to allow more banks to sell FX forwards

Wednesday, 29 December 2010 00:07 - - {{hitsCtrl.values.hits}}

BEIJING (Reuters) - China will allow more banks to sell currency forwards to their clients to further develop demand and the nation’s nascent derivatives market, the country’s foreign exchange regulator said on Tuesday.

Smaller Chinese banks that were previously barred from selling currency forwards can now partner their bigger, approved counterparts to offer forward contracts to clients, the State Administration of Foreign Exchange said on its website.

To match its growing economic clout, China wants to deepen its financial market by gently easing the government’s tight grip over the currency and interest rate regimes.

Currently, a Chinese bank must have an annual foreign exchange turnover of at least $20 billion (12 billion pounds) before it can apply for a licence to sell currency forwards.

That has shut out many small banks from the forwards market. Only 67 banks held the licence in 2009.

Bank of China <601988.SS> <3988.Hk> is the biggest player in the forwards market and sells forwards for a range of currencies including the U.S. dollar, the euro, sterling, the Hong Kong dollar and the yen.

While the yuan is still firmly controlled by China’s government, the break of its de facto peg to the U.S. dollar in June has made it slightly more volatile.

It has gained 3 percent since its June depeg and is a whisker from its highest level since a landmark 2005 revaluation.

In the long run, this should feed demand for currency forwards among Chinese importers and exporters, most of whom are not still not used to exchange rate fluctuations and are inexperienced in managing currency risks.

An expansion of the forwards market is therefore an important step in helping Beijing fulfil its repeated vows to free up the yuan to market forces.

China’s control over the yuan has often drawn flak from U.S. politicians, who accuse the world’s second-largest economy of manipulating its currency to gain trade advantage.