China to Trial Direct FX Swap Positions Offset Between Companies

Chinese authorities are aiming to further reform the structure of the foreign exchange market in the country

The China Foreign Exchange Trading System, which is a unit of the Chinese central bank, has issued an announcement stating its intent to allow companies to offset their FX swaps positions directly between themselves. The new structural change to the foreign exchange market in the country will be made on a trial basis initially.

Chinese companies will effectively be allowed to offset their existing positions open through currency swaps between themselves. The trial will allow banks and financial institutions to go around the limits imposed by current official limits. In essence the new rule is aiming to introduce a loophole for Chinese firms to tackle their exposure to foreign exchange risk.

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The Chinese government has been engaging in gradually relinquishing tight controls over its capital markets. While the tradition is very slow, the authorities are gradually moving the Chinese yuan towards a free float. A number of analysts have expressed opinions that the liberalization of the Renminbi market is likely to happen much sooner than most market players expect it.

Overnight SWIFT has released another edition of its Renminbi tracker report, which reveals that the usage of the Chinese yuan for payments by financial institutions worldwide has increased by 18 per cent in March. In addition the study reveals that about 40% of financial institutions worldwide have already adopted the yuan.

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