Lenders lobby for slice of yuan forward trade cake
The Bank of China's lucrative monopoly of yuan forward contracts business is coming under threat as other state and commercial banks lobby the People's Bank of China for a share of the market.
Banking sources said the Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China and smaller banks had stepped up pressure on the central bank to allow them to offer the service to their clients.
The renewed pressure comes amid growing expectations the yuan will be allowed to trade within a wider band to reflect market forces, thus generating more business for banks.
'There will be even greater demand for the contracts to hedge against currency risks if the yuan is allowed to trade in a wider band. So, naturally, all the big boys want a share of the pie,' a foreign banker said.
An Agriculture Bank official said: 'As it is now, there is a great demand for these contracts by our clients.' About two years ago, Beijing chose Bank of China to pilot the scheme to carry out yuan forward contracts for customers that need to hedge against currency risks, even though the range in which the yuan is allowed to fluctuate remains tightly controlled by the central bank.
Until recently, it was the nation's foreign exchange bank and was thus seen to have the expertise to handle the new field, especially since the yuan was under threat from speculators at the time of the launch.
Foreign currency analysts said the yuan's exchange rate against the US dollar, now at about 8.28 to the US unit, was tightly controlled by the central bank by a ceiling or floor of 0.3 per cent.
But a recent article in the China Foreign Exchange magazine - the official publication of the State Administration of Foreign Exchange, a body under the central bank - said the yuan band should be widened better to reflect market forces.
It said Beijing should 'allow the renminbi [yuan] to float in a wider band within pre-determined limits and gradually let market demand and supply play a decisive role in deciding the exchange rate'.
The yuan is convertible on the current account but not on the capital account.
Although fears of a yuan devaluation have waned, Beijing remains wary about possible speculation on the currency and controls trading tightly.
But with mainland entry into the World Trade Organisation imminent, many industry players expect the existing rigid exchange regime to evolve into a more flexible one and state banks are lobbying hard for business that could come with the change.
Yuan forward contracts involve the buying or selling of the currency at an established spot rate for delivery and payment at an agreed date, and to help customers to minimise currency risks and volatility.
'The other banks feel it is unfair that only the Bank of China can do this business, and they are losing clients as a result,' the foreign banker said.