Singapore Hedge Fund

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China: the risk of Selling Foreign Exchange Derivatives Under Control

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The People’s Bank of China, the central bank, recently made an investigation on derivatives operation of six domestic commercial lenders.

They included Industrial and Commercial Bank of China (ICBC, SHSE: 601398, and SEHK: 1398), Agricultural Bank of China (ABC), Bank of China (BoC, SEHK: 3988 and SHSE: 601988), China Construction Bank (CCB, SHSE: 601939, and SEHK: 0939), Bank of Communications (BoCom, SEHK: 3328 and SHSE: 601328) and China Development Bank (CDB). Such investigation actually has been made by the China Banking Regulatory Commission (CBRC), the top Chinese banking regulator, and the conclusion it reached is that the risk for commercial banks to sell foreign exchange derivatives is under control, revealed an insider.

Currently, foreign exchange derivatives sold in the country include foreign exchange option, foreign currency swap, foreign exchange interest swap and etc. The floating losses commercial banks suffer from selling such products has dropped to different extents thanks to rebound of the global market and importance they attached to downsizing such business. Statistics show that such business’ notional principal amounts of the nation’s Big Four state-owned commercial banks
, including ICBC, ABC, BoC and CCB, each has slid abut 50 percent since the fourth quarter of last year.

In addition, they lowered the proportion of complicated structural products in succession. Complicated structural products are always designed by foreign banks and faire value accounting of those products is also provided by them. They have become two big obstacles on the way of the growth of their Chinese partners’ derivatives business.

In order to reduce risk, Chinese companies have no choice but to buy foreign exchange derivatives. The pricing right is tightly controlled by foreign banks despite that the products are sold by their Chinese partners. As a result, a considerable part of the profit those Chinese banks gained from the business is taken by foreign banks.

Foreign banks know little about Chinese companies, so they prefer to sell products to the latter via Chinese banks. Those Chinese banks have to loan money to buyers of such products provided that loss takes place. Under such environment, those Chinese banks will be under rising credit risk. And the best way for them to solve the problem is to ask buyers of such products to pay deposits, added the insider.
with Trading Markets

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