China looks to future of finance
By Alex Skorecki
Published: February 10 2004 19:52 | Last Updated: February 10 2004 19:52
China's banking regulator has fired the starting gun on financial derivatives. No doubt many will join the race, but as so often in China it is not clear what the prizes will be.
The China Banking Regulatory Commission last week issued a clutch of rules and regulations allowing both local people and foreigners to trade futures, options and other instruments from the start of March. Banks, fund managers and other financial players are expected to explore the opportunities.
The potential is enormous. "Given the size of the market, everybody is pretty excited," said Feng Gao, at Deutsche Bank in Singapore.
Equally, the hurdles are considerable. China is still a highly immature country by global financial standards.
Because the renminbi is not fully convertible, any derivatives offered in China will for the foreseeable future be denominated in foreign currencies.
Derivatives are already traded in China. It is a country sucking in commodities at a great rate, and commodity futures are traded on the three exchanges of Shanghai, Dalian and Zhengzhou.
But financial derivatives are another matter. The Shanghai Futures Exchange almost two years ago applied to the regulator to trade stock index futures and said it was also considering interest rate futures and foreign exchange rate futures.
So far nothing has happened, except that it has signed a deal with the Chicago Mercantile Exchange to develop products.
Despite the new rules aimed at ensuring safe markets, the atmosphere is likely to be cautious. People will not have forgotten the mid-1990s, when the government closed a dozen commodity futures exchanges amid spiralling speculation and price-rigging.
Many of China's brokerages are still state-owned and given to trading on their own account to the disadvantage of clients. China's securities industry has been criticised as suffering from corruption, mismanagement and price manipulation.
Furthermore, when people say China has huge potential, they are primarily referring to its population. Its financial size is still relatively modest.
The Chinese government bond market is worth about $500bn in terms of bonds outstanding, compared with the US Treasury market at about $8,000bn. The Chinese equities market is also worth some $500bn, although two-thirds of this is non-tradeable stock.
Derivatives are primarily used to hedge. For example, an investor with exposure to government bonds can hedge against the prospect of their value being eroded by changes in interest rates through the purchase of bond futures.
Chinese companies, like their counterparts in other countries, want to manage their liquid assets as efficiently as possible. Although they are already using derivatives, activity is still limited and there is much scope for foreign banks to sell corporates their derivatives products and expertise.
Gareth Hewett, a spokesman at HSBC in Hong Kong, said his bank would be applying for a licence from the regulator. "We see growing demand from local corporates, which are getting more sophisticated in their use of cash management products," he said.
Kenneth Chiu, corporate derivatives marketing manager at JP Morgan in Hong Kong, said it expected to offer corporates products in two main areas - "yield enhancement" of their portfolios and reduction of liabilities in their cashflows.
Bank of China International, a domestic Chinese bank, started offering financial derivatives from its Hong Kong base last year, and says it will now start doing so from its mainland China branches.
As for renminbi-denominated derivatives, the scope is much more limited. Commercial banks operating in China are constrained tightly by the central bank and can only set interest rates within a very narrow range, whether for loans or deposits. Reform might take another five years.
Without a free market in interest rates, financial derivatives would not practicable as spreads would be too wide to attract custom.
Derivatives are just part of a wider financial agenda by the Chinese government that includes plans for further huge sell-offs of state-owned shares. The new rules implicitly acknowledge that modern financial markets can no longer function efficiently without them. |
