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Derivatives

After Liberalization, Bankers Ask For More

This year saw the introduction of licenses to trade non-renminbi derivatives in China and a burgeoning market access product industry, though it may be short-lived.

Anita Fung

This year saw the introduction of licenses to trade non-renminbi derivatives in China and a burgeoning market access product industry, though it may be short-lived (see following story). But derivatives professionals are still wanting more. They are asking for an onshore renminbi currency and rates market as well as more local players stepping in to provide distribution channels to the local corporates. "Opportunities in China will gradually grow with the roll out of the [World Trade Organization] schedule towards a fully liberalized market by the end of 2006," said Anita Fung, treasurer and co-head of Asia-Pacific global markets at HSBC in Hong Kong.

Market participants said the domestic market has gained momentum after regulations granted new licensing for non-renminbi derivatives (DW, 2/2). "The new regulations for derivatives have also provided greater clarifications on derivatives business and we expect activities in this area to increase in the coming years," added Fung. In addition to international houses, more domestic players are expected to obtain a license and start their own forays into the market. "Local financial institutions are better at extending credit to local corporates and will be able to offer derivative products to a larger array of small and medium size enterprises. This will bring a lot of new clients to the market," said Jamie McWilliam, Asian head of derivatives marketing atABN AMRO in Hong Kong. Domestic financial houses will likely act as intermediaries and distribute products structured by foreign players.

Qualified foreign institutional investor quotas are expected to be enlarged, given the growing interest in the domestic Chinese market. This year over a dozen firms obtained QFII status, which allows them to trade domestic assets as well as offer synthetic market access products. "We'll see further increases in allocations," said McWilliam. These have mostly been used as an investment product, but McWilliam said, "There's not only an equity derivatives angle. It can also be used as a risk management tool, for example by purchasing domestic vanilla or callable bonds."

Also in the sights of bankers is the possibility of an onshore domestic currency derivatives market. "We may see further interest rate liberalizations as well as the possibility of an onshore renminbi derivatives market, which would better allow banks or corporates to hedge their renminbi and interest rate exposures," said HSBC's Fung. Participants also anticipate some retooling of the currency peg against the U.S. dollar within the next few months (DW, 11/12).

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