Halister News

(Bloomberg) -- In a perfect world, derivatives would be used for hedging the risk of a related security. This could be what China’s foreign-exchange regulator is hoping for as it plans the continued development and opening up of its forex market. Last week a State Administration of Foreign Exchange spokeswoman said derivatives are risk-management tools, not profit-making instruments. However, the lines between hedging and speculation can, and do, get blurred, sometimes with spectacularly bad outcomes.

• There are already warning signals from the development of the offshore yuan market, which started in Hong Kong six years ago
• The first warning sign was in early 2014 when the offshore yuan dropped suddenly; structured products were skewed too far toward stability or moderate strengthening in the currency, which led to a sharp drop when the yuan moved the wrong way
• Since then there have been other occasions when the offshore tail seems to be wagging the onshore dog in both the options and forward markets
• From late December through January this year there was a massive jump in USD/CNH as bets on a further weakening of the yuan proliferated
• For now China’s central bank seems to have reestablished control over its forex markets, helped by employing an unpredictable pattern to the closely watched daily yuan reference rate setting.
• The resulting confusion among investors is helping to lower trading volumes and directional exposure
• Maybe China has learned enough from observing derivatives in other countries to be convinced they can keep a lid on excessive speculation. Or, they don’t subscribe to one of the most dangerous expressions in the investing lexicon - it’s different this time