Now that’s an option
In August the Chinese State Administration of Foreign Exchange (SAFE) relaxed the rules surrounding the use of options in the onshore market. The new rules allow domestic corporates to purchase renminbi-based swaps and options – increasing the range of risk management tools at their disposal.
Previously, corporates had limited choices around how to hedge the risks posed by currency volatility – namely forwards and buy options. In addition, the cost of these vanilla instruments often outweighed the rewards. This welcome relaxation of the rules will see corporates trading more exotic structures, although they will still need to adhere to certain guidelines.
To help corporates understand the impact of the new changes, Guan Tao, Director of the Balance of Payments Department at SAFE offered the following tips: “First, enterprises should adapt to the new normal of bi-directional fluctuations of the RMB exchange rate by changing their linear and unilateral thinking, shifting from merely managing risks associated with a unilateral RMB appreciation to comprehensively managing risks from the RMB bi-directional fluctuations, and focus on their main business by changing the uncertainties of bi-directional fluctuations into certainties through hedging activities.
“Second, enterprises should understand their deals and not make unfamiliar deals. They should assess the value of derivatives and determine the level of risk limitations before conducting deals. Third, the financial departments of enterprises should not function as profit centres but should regard derivative transactions as a tool to lock up risks, not a tool to make profits. Fourth, enterprises should properly conduct hedging activities as excessive hedging is a form of speculation and can be risky,” noted Tao.
Despite the fact that the onshore options market is still very much in its infancy, and that the full impact and scope of the changes will take time to be seen, the initial reaction has been broadly positive. The move is seen as another step in the right direction – opening up the Chinese market yet further and offering corporates in the country more choice when it comes to hedging.
Treasury Today Asia will be closely monitoring the impact of the changes and will report on these in more detail over the coming months.