China has begun trading onshore forex forwards and broadcasting live quotes from its biggest banks, signaling possible expectations for how much the yuan might rise in one year. Forwards allow a company or bank to lock in exchange rates for a foreign currency payment at a specified future date.
On the Web site of China’s interbank markets (www.chinamoney.com.cn), the China Foreign Exchange Trade System posted the following statement: “We formally added foreign exchange forwards as a new trading instrument and have upgraded our system.”
Beijing, after canceling the U.S. dollar peg and revaluing the yuan on July 21, has said that banks would be allowed to trade yuan forwards and swaps with each other in the interbank market. The approach of an onshore forwards market had triggered some interest in the so-called “convergence trade,” in which speculators take advantage of the gap between the yuan and the U.S. dollar by buying dollars for yuan outside of China, where they are cheaper, and selling them in China.
Prior to the revaluation, the government allowed only a small number of players, including Bank of China and the Industrial and Commercial Bank of China, to settle forex forwards for local corporate clients.
A few foreign banks, such as UBS A.G. and Citigroup Inc., also won approval to trade small volumes of over-the counter financial derivatives. China had not allowed financial derivatives on its capital markets since 1995, when it shut down Treasury bond futures trading after a price-rigging scandal.
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