| HONG KONG
HONG KONG Aug 7 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
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
CHART OF THE WEEK:
Hong Kong's yuan loans increase steadily: link.reuters.com/guc62w
CNH Tracker-China offshore yuan bond pipeline robust on
Commission rates for dim sum bond underwriting squeezed in first
China's booming offshore debt market not yet a global play
Wanted: Dim sum bond traders
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
(1 US dollar = 6.1685 Chinese yuan)
(Additional reporting by Saikat Chatterjee; Editing by