Banking

China likely to allow yuan options trading by banks

(Agencies)
Updated: 2010-12-13 14:29

BEIJING - China may allow yuan options trading to help banks and companies protect their earnings from foreign-exchange risk, according to three different sources with knowledge of the plan, Bloomberg News reported Monday.

The State Administration of Foreign Exchange, the nation's currency regulator, has asked for some banks' opinions on the issue, according to the sources, who declined to be identified because the watchdog hasn't announced the plan. Trading may start in two months, the agency reported, citing two sources.

Options give the buyer the right, not the obligation, to buy or sell the currency at a specific price on a specific date, it said.

"There are very limited tools for companies to hedge against exchange-rate risks," said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co, 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," Liu added.

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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.

Yuan options are traded outside of China between banks and the Chicago Mercantile Exchange, the biggest US futures market, began trading such contracts in August 2006, the report said.

China is promoting greater use of its currency in global finance and trade to reduce reliance on the US dollar. In November, the central bank started allowing the yuan to trade against the Russian ruble in the interbank market, it said.