China's foreign exchange regulator warned on Sunday against the speculative use of foreign exchange financial derivatives because of the massive risks involved.

Risk evasion is the top priority in foreign exchange transactions, said an official with the State Administration of Foreign Exchange (SAFE). He said the derivatives market is developing, but is still very much in its teething stage and the risks are high.

Domestic institutions and individuals must get permission from the administration before using foreign exchange derivatives for any kind of overseas RMB transactions, including forward and swapping transactions, according to the latest notice issued by the SAFE.

The notice said banks should also provide financial products and services that shy away from RMB exchange rate risks.

Banks are now providing residents with better services for preserving their assets and dodging risk when they invest in foreign currencies, according to the notice.

The official said that firms could use foreign exchange derivatives in a non-speculative manner to preserve the value of assets, limit foreign exchange risks and make some profit. The gains and savings could outweigh the transaction costs, said the official.

He said China's foreign exchange market has developed rapidly since the RMB exchange rate reforms came into effect.

The Government is loosening its control over certain kinds of foreign exchange transaction, and the number of investors is increasing, he said, adding that investors' legitimate rights and interests would be safeguarded.

As of the end of September, 53 domestic banks were approved for forward exchange transactions, 21 of whom are authorized to carry out extended swaps between the RMB and foreign currencies.

Forward exchange transactions in the first nine months of 2006 increased 42 percent year on year.