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China needs more derivatives, govt. financial official says

Section: Daily Dispatches

By Christina Soon
Bloomberg News Service
Saturday, November 4, 2006

BEIJING -- China needs derivatives products, including a deepening forwards market, to help companies hedge against risks as the yuan appreciates against the dollar, Vice Finance Minister Lou Jiwei said.

"We need products to hedge against risks," Lou told a conference in Beijing today. "Yuan gains will have a certain risk for companies. We should have a yuan forwards market."

The yuan rose for a second week on speculation the central bank will let the currency strengthen further to prevent exports from increasing China's record trade surplus and foreign-exchange reserves.

The yuan this week rose 0.23 percent to 7.8716 against the U.S. currency as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System.

China's State Administration of Foreign Exchange banned banks operating in the country from trading yuan derivatives in the offshore markets, according to a document dated Oct. 25 issued to lenders.

Foreign banks have been using offshore forwards to make bets on the yuan and avoid restrictions placed on onshore trades by the central bank. Domestic lenders have also been using the contracts, which are standardized and traded between global banks outside of an exchange. The document doesn't specifically refer to forwards trades or give a reason for the limits.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Yuan forward contracts are non-deliverable as they are settled in dollars and not local currency.

Derivatives are financial instruments used to hedge risks or for speculation. They're derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives.

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