CNH Tracker-Banks launch new yuan FX options for companies in China

HONG KONG Thu Aug 7, 2014 12:09am EDT

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HONG KONG Aug 7 (Reuters) - A batch of banks have started to launch new structured currency option products denominated in yuan for their corporate clients in China in the past week, after Beijing eased controls on yuan derivatives this month.

That will equip Chinese importers and exporters with more sophisticated financial instruments that will help them better hedge currency risk against the backdrop of a more volatile yuan this year.

China's State Administration of Foreign Exchange (SAFE) announced in June that banks would be allowed to offer more diversified option products which can combine buy and sell options, instead of limiting it to a simple option structure.

An option is a tool that gives the owner the right, but not the obligation, to buy or sell an asset at a specific price.

Deutsche Bank said last Friday it had executed the first series of yuan option trades for Mengniu Dairy and other Chinese corporates across the chemical, coal, agriculture, and manufacturing industries.

HSBC and DBS also said they had completed similar deals for their clients.

These trade instruments, such as FX call spreads, enable corporates to minimise risks and capture benefits associated with exchange rate fluctuations in a two-way currency market compared with basic options.

The Chinese currency experienced its most sustained depreciation ever at the beginning of the year as the central bank jumped into the market to shake out hot money that speculated on non-stop appreciation of its currency.

However, it has seen steady gains since late May even as the People's Bank of China (PBOC) gradually weakened the official midpoint. The spot rate crossed the midpoint to the strong side on Wednesday, the first time since September 2012.

The much greater fluctuations of the yuan caught Chinese companies, who seldom hedged FX risks given the currency appreciated steadily for years, off guard and forced many of them to start using derivatives to avoid further losses.

Heavy hot money inflows seen earlier largely reflected exporters frontloading their FX selling needs, while importers have been under-hedged and now have to cover their short dollar positions, HSBC analysts said in a report.

China is accelerating the pace to reform its domestic foreign exchange market by allowing the yuan to trade more freely, widening its daily trading band in March and letting banks set yuan/dollar FX rates for retail clients.

In early July, it let banks freely set their own exchange rates for the yuan against the dollar in over-the-counter transactions, a major step towards allowing more market forces to determine the direction of the currency.

Letting the market price the yuan against the dollar is a pre-requisite for wider liberalisation, and at the same time decreases the need for Beijing to accrue dollar reserves in the name of managing the exchange rate.

Most analysts believe the yuan will strengthen moderately for the rest of the year on stabilisation in economic growth and supportive trade flows, though uncertainty remains given capital outflows that began in the second quarter.

WEEK IN REVIEW:

* IFC, a member of the World Bank Group, added 750 million yuan ($121.6 million) to an outstanding three-year London-listed dim sum bond on Wednesday, raising the total size to 2.75 billion yuan, the largest debt denominated in the yuan that ever listed on the bourse.

* Robust offshore yuan activity. Loans denominated in the yuan amounted to 139.4 billion yuan by the end of June, up 21 percent from the end of last year, according to the Hong Kong Monetary Authority (HKMA). Daily trading volume of yuan spots and forwards is close to $30 billion, compared with $20 billion at the end of 2013.

* Yuan deposits in Hong Kong fell to 925.9 billion yuan ($150 billion) in June, down 3.1 percent from a month earlier, the HKMA said on Thursday. Cross-border trade settled in yuan rose 19.8 percent to 531.8 billion yuan on a month-on-month basis.

CHART OF THE WEEK:

Hong Kong's yuan loans increase steadily: link.reuters.com/guc62w

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d (1 US dollar = 6.1685 Chinese yuan) (Additional reporting by Saikat Chatterjee; Editing by Jacqueline Wong)

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