The Emerging Risk
Environment in China
Dr. Guangping (Peter G.) Zhang
Deputy Director General
China Banking Regulatory Commission
Shanghai Bureau
Asia-Pacific Finance and Development Center
June 18, 2008
Major Contents
 Risk Management Instruments in China
On-shore Products
FX Forwards (Merchant & Inter-bank), FX Swaps, Bond
Forwards, IRS, Stock Warrants
Off-shore Products
Foreign CNY Derivatives
Non-deliverable Forwards (NDF), Non-deliverable
Options (NDO), Non-deliverable IRS (NIRS),H share
stocks, Index futures and Options
 Risk Management Supervision & Related Issues
 BASEL II Implementation
 Difficulties for Risk Management Practices in China
Lack of Options Market and Implied Volatilities
Low Liquidities of OTC Products
Product Design & Pricing
CNY Forwards (Merchant)
PBOC: “The Tentative Administrative
Methods for RMB Forward Settlement”
January 18, 1997
BOC: April 1st , 1997
CCB: April, 2003
ICBC: April, 2003
ABC : April, 2003
China Foreign Exchange Trade
Center (CFETCS)
China Foreign Exchange Trade
Center (CFETCS) was
authorized to trade CNY
forwards on August 15, 2005
CNY/USD
CNY/JPY
CNY/HKD
CNY/Euro
China Foreign Exchange Trade
Center (CFETCS)
Trading has not been active at
CFETCS,Trading turnover in
1Q2006 RMB3420 million (430 million USD);
2Q2006 RMB7210 million (900 million USD)
3Q2006 RMB31.5 billion (3.98 biillion USD)
4Q2006 8.75 billion USD
1Q2007 5.323 billion USD
2Q2007 5.347 billion USD
3Q2007 4.323 billion USD
4Q2007 7.391 billion USD
2006 $14.06 billion; 2007 $22.384 billion
Liquidity of CNY Forwards (Merchant)
BIS 2007: Daily Average FX Trading in April 2007 $9
billion (spot, forwards and swaps 61.4%, 31.3% and
7.4%), thus
Total forwards 9*31.3% = $2.817 billion daily
average in April 2007, $59.157 billion in April 2007;
April 2007 Forwards Inter-bank = $1.996; thus April
2007 forwards merchant trading 59.157-1.996 =
$57.161 billion in April 2007; total forwards
merchant around $680 billion for 2007, total
forwards including inter-bank about $703 billion for
2007, or about 32.3% of total trade value of $2.175
trillion in 2007, compared to international ratio
around 150%
Foreign Exchange Swaps Trading
3Q2006 15.6 billion USD
4Q2006 31.4 billion USD
2006 50.9 billion USD
1Q2007 55.7 billion USD
2Q2007 77.7 billion USD
3Q2007 100.6 billion USD
4Q2007 81.58 billion USD
2007 total $315.58 billion
Merely 17.6% of daily FX swaps trading in
April 2007
Other CNY Derivatives in China
• Interest Rate Swaps
– SHIBOR Swaps
• Bond Forwards
Wealth Management Products
Deposits with embedded options
Deposits linked to Libor, commodity
indexes, stock indexes, etc.
IRS Trading
CNY (billion)
1Q2007
2Q2007
3Q2007
4Q2007
2007
39.364
63.902
62.253
53.171
218.69
$ billion
5.18
8.41
8.19
6.99
28.77
Offshore CNY Derivative Products
Non-deliverable Forwards
NDF
Non-deliverable Options
NDO
Non-deliverable Forward Options
NDFO
Non-deliverable CNY Swaps
NDS
Non-deliverable FX Swaps
Non-deliverable IRS
Structured Notes
Deposits with embedded Options
NIRS
CNY NDF-most Popular Product offshore
Came into existence in 1996 before Asian
financial crisis, yet liquidity was
extremely low
Liquidity began to pick up late in 2002
Trading turnover estimated around US$150180 billion in 2003 & 2004!
around US$250 billion in 2005
around US$300 billion in 2006
around US$360 billion in 2007
2008-4-2
2007-12-2
2007-8-2
2007-4-2
2006-12-2
2006-8-2
2006-4-2
2005-12-2
2005-8-2
2005-4-2
2004-12-2
2004-8-2
2004-4-2
2003-12-2
2003-8-2
2003-4-2
2002-12-2
Revaluation Pips
(1000)
(2000)
(3000)
(4000)
(5000)
(6000)
(7000)
(8000)
(9000)
04-2-6
03-11-6
03-8-6
03-5-6
03-2-6
02-11-6
02-8-6
02-5-6
02-2-6
01-11-6
01-8-6
01-5-6
01-2-6
CNY/USD Historical Volatilities
0.20
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
2008-5-5
2008-2-5
2007-11-5
2007-8-5
2007-5-5
2007-2-5
2006-11-5
2006-8-5
2006-5-5
2006-2-5
2005-11-5
2005-8-5
CNY/USD Historical Volatilities
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2005-8-5
2005-10-5
2005-12-5
2006-2-5
2006-4-5
2006-6-5
2006-8-5
2006-10-5
2006-12-5
2007-2-5
2007-4-5
2007-6-5
2007-8-5
2007-10-5
2007-12-5
2008-2-5
2008-4-5
2008-6-5
CNY/USD Historical Volatilities
Compared to Euro & Yen Vols
80%
70%
60%
50%
40%
30%
20%
10%
0%
2008-4-1
2008-2-1
2007-12-1
2007-10-1
2007-8-1
2007-6-1
2007-4-1
2007-2-1
2006-12-1
2006-10-1
2006-8-1
2006-6-1
2006-4-1
2006-2-1
2005-12-1
2005-10-1
2005-8-1
Appreciation and Further
Expectation for RMB
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
2003-4-1
2003-7-10
2003-10-22
2004-2-5
2004-5-19
2004-8-24
2004-12-6
2005-3-21
2005-7-1
2005-10-12
2006-1-18
2006-4-25
2006-7-31
2006-11-13
2007-2-28
2007-6-14
2007-9-19
Onshore CNY Forward Rates vs.
Offshore CNY NDF Rates
500
-500
-1500
-2500
-3500
-4500
-5500
-6500
BASEL II Implementation in China
Major Chinese Banks are Required to
Implement BASEL II by 2010
Market Risk Management
Credit Risk Management
Future Market Demand
Hedging CNY FX Risk
-Steady Growth of Foreign Trade
-Expansion of QDIIs
-International Investments
-Foreign Participation of Domestic
Capital Market, Banking Industry
Need to Develop the Options Market
Challenges for Market Risk
Management in China
•
•
•
•
Construction of reliable Yield Curve
Interest Rate Liberalization
Structuring and Pricing Capacity
Market Risk Management Models (VaR)
Challenges for Market Risk
Management in China
• Lack of Exchange Trade Options
• No Implied Volatilities
• Low Liquidity of Existing Products
Comparisons with Indian Rupee
Derivatives Markets
Average Daily Trading Value of Foreign Exchange in China & India
Foreign
Exchange
Trading
($billion)
Spots
Outright
Forwards
Foreign
Exchange
Swaps
China
9
5.53
2.82
0.67
India
34
14.48
9.35
10.13
China
61.4%
31.3%
7.4%
India
42.6%
27.5%
29.8%
32.6%
11.7%
55.6%
Word
3210
Average Daily IR derivatives in April
$ 1 billion in 2004 and $ 3 billion in 2007, India,
---in China
“Exotic Options”
1997(1st),1998(2nd), 2008(3rd)
“Chinese Yuan Derivative
Products”(English,400p)
World Scientific
October 2004 (Peter G. Zhang)
Chinese Yuan Derivative Products
China Financial Press (in
Chinese,900p), May 2006;
2nd Edition (around 1300p), April 2008
Thank You!