JPM JP Morgan Chase and Co

By Shen Hong

SHANGHAI--China took new steps to modernize and open up the way its currency is traded, making a gesture of commitment to change after the yuan suffered last week its biggest one-day decline in more than two years.

In a statement released late Tuesday, China's foreign-exchange regulator said it would allow investors to use the eventual transactional gain or loss, a practice known in the industry as "netting," to settle foreign-exchange forward contracts.

A currency forward contract allows investors to lock in an exchange rate for the purchase or sale of a currency on a future date, a popular tool that enables them to hedge against interest-rate and exchange-rate risks.

Until now, forex forwards in China's domestic market have been settled with the delivery of the principle amount of the underlying currencies. The new rule by the State Foreign Exchange Administration enables final clearing of forward contracts using net cash flows.

The relaxation is a move to align China's tightly controlled domestic yuan market with global markets, with a goal of attracting a wider diversity of buyers and sellers, traders said.

Although the administration stressed in its statement that all forward contracts should be based on "genuine demand," there are concerns that the new rule may unleash unwanted enthusiasm among speculative investors and lead to greater volatility and risk for China's currency in the future.

"So does that mean from now on companies that have nothing to do with import or export can start playing with yuan forwards? That prospect sounds a bit unsettling to me," said a Shanghai-based head of currency trading at a Chinese bank.

The regulatory announcement came after the yuan recorded a 1% drop against the U.S. dollar Thursday, which was its biggest one-day decline since the Chinese central bank devalued the currency in August 2015. Before the abrupt fall, it had surged more than 8% against the dollar in the past year, amid a broad-based pullback for the greenback.

The dollar is buying 6.3447 yuan, little changed from 6.3440 at Tuesday's closing.

Separately, China's central bank also announced Tuesday that it has named JPMorgan Chase Bank N.A. as a yuan clearing bank in the U.S., making the latter the first foreign lender in such a role and signaling Beijing's commitment to further globalizing its currency.

(END) Dow Jones Newswires

February 13, 2018 22:52 ET (03:52 GMT)

JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
From Mar 2024 to Apr 2024

JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
From Apr 2023 to Apr 2024