China offers more forex hedging tools in the wake of the yuan volatility

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SHANGHAI – China’s foreign exchange regulator said Friday it would provide new derivative instruments to help companies better hedge their currency risks in the wake of the recent massive turmoil in the Chinese yuan.

The State Administration of Foreign Exchange (SAFE) will make it easier for banks to conduct forex derivatives trading and encourage lenders to better manage forex risks, according to a notice on SAFE’s website.

Wang Chunying, deputy chief of SAFE, said in a statement: “This announcement is designed to further enhance the depth and breadth of China’s foreign exchange market and to help market participants better manage currency risks.”

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The yuan depreciated nearly 4% against the dollar in April, a record monthly fall, and has risen sharply this month.

Chinese financial institutions, which can currently trade European-style currency options, will also be allowed to trade American- and Asian-styles to better meet the diverse hedging needs of companies, SAFE said.

Banks are also encouraged to use derivatives to hedge their Forex exposure and regulators will allow more banks to conduct Forex derivatives trading.

Forex regulators say it will continue to promote a “market neutral” mentality and the use of hedging tools, while discouraging unilateral bets on the yuan.

Currency hedging activity using derivatives increased by 59% in volume in 2021 from a year earlier, SAFE said. (Reporting by Shanghai Newsroom; Editing by Jason Neely and Hugh Lawson)

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