Foreign Exchange News
- Chinese banks ask for more hedging instruments to reduce exchange losses
Date: 16-Jan-2007 Sources: (Xinhua Online)
Major Chinese banks are asking for more hedging instruments that will allow them to juggle foreign exchange losses as the yuan appreciates.
'As the yuan increases in value, Chinese banks are becoming more exposed to potential exchange losses when they convert overseas profits into yuan and conduct foreign exchange transactions with their own assets,' said Wen Bin, a senior strategic analyst with the Bank of China (BOC).
'Chinese commercial banks need more derivative instruments to hedge against exchange losses,' said Wen, adding that the country's foreign currency exposures of 80 billion U.S. dollars were mainly concentrated in the Industrial and Commercial Bank of China (ICBC), the China Construction Bank (CCB), Bank of China and Bank of Communications.
The instruments currently available for exchange rate hedging are insufficient as the common consensus among overseas investors is that the yuan will continue to appreciate, ruling out option transactions, he said.
An option transaction is one of the hedging instruments available to Chinese banks. It gives the buyer the right, but not the obligation, to buy or sell at a set price on or before an agreed date.
At present, the role of the option transaction as a hedging tool for Chinese banks has been practically nullified because the transaction usually involves high premiums and it has become difficult to predict the growth margin of the yuan's value. The buyer is able to cancel the option transaction but the premium may have already exceeded the exchange losses.
'With option transactions incapable of guarding against exchange losses, at the moment Chinese banks can only rely on swap and forward transactions,' said CCB president Guo Shuqing.
A swap transaction involves the exchange of two currencies on a fixed date with the assumption that the two currencies will be of equal value on that date. A forward transaction is an obligation to fulfil a pledge made on a future date, which does not require the payment of a premium. It can not be broken even if the buyer is set to incur a loss.
As the Chinese government controls capital account foreign exchange flows, Guo called on banking regulators and the central bank to relax restrictions on hedging, giving Chinese banks more leeway to hedge their foreign currency exposures.
There are a number of regulations currently in place which hinder the efficiency of conducting swap and forward transactions and, unlike overseas banks, Chinese banks are not allowed to combine hedging tools freely.
China's three largest state-owned commercial banks - ICBC, CCB and BOC - have found themselves facing exchange losses of billions of yuan because the currency has risen 3.88 percent in value since the reform of the exchange rate system was launched in July 2005.
The three banks have large amounts of U.S. dollars and other foreign currencies mainly because they have all recently completed substantial initial public offerings overseas.
BOC, the country's largest foreign exchange bank, suffered exchange losses of 3.5 billion yuan (438 million U.S. dollars) in the first half of last year while CCB suffered losses of 2.4 billion yuan.
Goldman Sachs, the world's biggest investment banking firm, has predicted BOC's profits will shrink 3.3 percent and net profits 0.6 percent for every one percent rise in the yuan's value.
Many bank executives have said their banks will suffer from a depreciation in foreign currency assets if the yuan continues to appreciate.
Foreign currencies account for 0.52 percent of the total assets of China's five major listed banks - the three listed state-owned banks, the Bank of Communications and China Merchants Bank, the China Securities Journal reported on Monday.
But earnings per share (EPS) of the five banks will decrease an average 0.014 yuan for every five percent rise in the yuan's value, the report quoted an anonymous analyst as saying.
EPS stood at 0.09 yuan for the ICBC and 0.07 yuan for the BOC on June 30 last year, according to the two banks' half-year reports in 2006.
However, BOC vice president Zhu Min was optimistic, saying the foreign currency assets yielded higher than the domestic currency assets, which could offset the exchange losses caused by the yuan appreciation.
Zhu said BOC's net foreign currency exposure was too small to pose a substantial threat to the bank.
The bank rose to number six in the world in terms of assets at the end of last year, with total assets of 4.7 trillion yuan and a capitalization of 120.8 billion U.S. dollars.
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