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China will permit designated banks to trade yuan/foreign currency swaps on behalf of their clients from March 1, according to a Reuters report quoting the country’s foreign exchange regulator.

Non-bank clients will be allowed to sign agreements now and exchange yuan and foreign currencies, and their interest rates, at a future time, the State Administration of Foreign Exchange said late on Sunday. Currently only banks can trade yuan/foreign currencies swaps.

The reform is part of China’s efforts to expand yuan business to help regionalise and eventually globalise the currency. China has been under pressure by the US to appreciate its currency at a faster rate.

According to the report, China’s move to allow development of derivatives based on exchange rates will give Chinese banks and companies badly needed tools to hedge currency risks as the yuan gradually becomes more volatile in the future in line with those reforms.

“The notice on business related to yuan/foreign currency swaps of bank clients is issued in order to allow domestic economic entities to hedge risks,” the SAFE said in a statement on its website,

Bank branches would also be allowed to perform yuan/currency swaps on behalf of clients under the precondition that they are authorised to do so by their headquarters, the SAFE was quote saying.

Interest rates agreed to be exchanged in the swaps must not exceed the limits set by the People’s Bank of China (PBOC), among other provisions set by the forex regulator, which comes under the central bank.

The PBOC is launching more derivatives linked to the yuan’s exchange rate and interest rates, such as those based on the yen , the euro , the dollar , international bonds and bank deposits, as it eyes more hedging tools for Chinese companies.

For now, the yuan has moved in an average range of about 100 pips per day. While its movements are now much wider than during the time of a de facto peg before June 2010, they are still far too small to create real demand for hedging.

China’s official interest rate system is completely controlled by the government. Deposit rates are allowed to be set slightly lower than PBOC benchmarks, while lending rates may be slightly higher. – Source: Reuters


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