The Chinese market is one of the hottest areas for derivatives and upcoming legislation this year is expected to open the flood gates, giving access to more clients and more products. "Market participants are waiting enthusiastically," said Anita Fung, treasurer and co-head of global markets at HSBC in Hong Kong. TheChina Banking Regulatory Commission is expected to release new derivatives regulations in the first weeks of the new year. "The end result will be much more transparency," said Angela Papesch, head of the Asia-Pacific office at the International Swaps and Derivatives Association in Singapore.
The upcoming legislation is expected to amalgamate existing regulation and give greater legal certainty to transactions. "The regulations haven't existed in a comprehensive form or shape before," said Papesch. Paulus Mok, head of treasury marketing at Citigroup in Shanghai, expects the change in regulation to boost volumes.
In addition to simplifying laws and procedures, the new legislation will likely also allow international securities houses to sell a larger range of derivatives to local customers. Chin-Chong Liew, partner at Allen & Overy in Hong Kong, said, "This will make it easier for end users to use derivatives for non-hedging purposes." Liew explained that end investors should be able to purchase a wider array of products, such as dollar-denominated credit-default swaps, collateralized debt obligations and interest rate options. Currently end users typically purchase offshore derivative-embedded instruments such as notes and deposit-linked instruments, which are not classified as derivatives.
The expected market liberalization has already sparked talk of an onshore renminbi-denominated derivatives market. Bankers expect foreign exchange forwards to be more widely permitted and used, with the potential for currency or interest rate derivatives to develop. "Within 12 months it's possible but the probability is low," according to Philip Tsao, managing director and joint head of the Asian debt capital markets group at UBS Warburg in Hong Kong. He is pessimistic about this happening in 2004 because of the general slow pace of change in China. Tsao, however, does expect that the renminbi's peg against the dollar will loosen to allow the renminbi to appreciate, which could introduce some volatility into the fx market.
On the equity side, market participants are also readying further liberalization. "China will surprise us all on the pace of reform," said Justin Kennedy, managing director in Asia-Pacific equity derivatives at Citigroup in Hong Kong. He noted that further relaxation of rules for qualified foreign investors, the allowance of onshore capital protected products and the launch of financial futures have a strong possibility of occurring this year or next.
