CHINA'S central bank is rejecting immediate plans to introduce yuan forward contracts because of risks in financial derivatives, a senior banker says. People's Bank of China (PBOC) deputy governor Chen Yuan said many Chinese financial institutions had made use of financial derivatives to fund long-term projects, which had led to more risks. 'We hope to develop the financial derivative market only after we can correct the financial institutions' irregular behaviour,' he said. The central bank is worried that financial institutions will lock up money in long-term projects and risk failing to honour commitments to pay on the delivery of forward contracts. A forward contract is an agreement in which an asset is purchased or sold at a specified future price on a specified future date. It is essentially a bet on where a particular exchange rate will trade. The market buzzing with talk early this year that the Shanghai-based Foreign Exchange Centre would start to trade dollar-yuan forward contracts in April, but the plan apparently has been shelved. 'Irresponsibility by financial institutions has led to them being denied access to derivatives,' W.I. Carr economist Joe Zhang said. He believed the true reason was that the PBOC did not believe the financial institutions had the ability to manage derivatives, and that the central bank itself did not have the expertise. There are worries that a lack of currency forward contracts could pose a threat to Chinese enterprises, which are prevented from hedging foreign exchange risks. But Mr Zhang brushed aside the concern. 'Since 1994, the yuan's exchange rate has been very steady against the US dollar. It does not appear to be a major problem,' he said. He said currency hedging tools would be needed, if the yuan were to become freely convertible. Mr Chen, after a Hong Kong seminar on global payment systems, would not comment on when forward contracts would be introduced. Marking an increasing financial integration across the border, Mr Chen said China's National Automated Payment System in yuan and Hong Kong's Real Time Gross Settlement System in Hong Kong dollars would be linked when both began to function in 1997. 'These two payment systems will be linked to each other, and hopefully with payment systems of major currencies as well,' he said. He said the Hong Kong dollar would continue to exist for at least another 50 years under the Basic Law. There would be 'one country, two currencies, two monetary systems, two monetary authorities and therefore two independent payment systems' after 1997. Mr Chen was optimistic about allowing foreign participation in the domestic yuan business soon, provided foreign and domestic banks faced the same tax requirements. 'It involves taxation arrangements, because currently, foreign enterprises, including foreign banks, are subject to a lower tax burden. But I believe it won't take too long [to unify the tax rate],' he said.