FX AND REPATRIATION
Non-deliverable Forwards  for Renminbi Take Off
November 16, 2006
Betty Penzner

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Offshore NDFs or non-deliverable forwards are a form of derivative that is used to hedge exposure to currencies, often in emerging nations, and exchange them at a future date, commonly one to two years, for another currency, usually the U.S. dollar - hence "non-deliverable."  The price is set in the agreement.

During the past summer, this form of hedge transaction has been authorized in China; first to the big four state-owned commercial banks and three share-holding commercial banks and a few months later to all local banks, including foreign banks, with licenses to trade in the interbank foreign exchange market.

"The scope of legitimate transactions was extended from those arising from trade in goods and services and investment income to all current account transactions and select capital account transactions, including repayment of approved foreign borrowing,  domestic companies' foreign exchange receipts from foreign listing, etc.," according to Kathy Chan, HSBC, Hong Kong.

Standard Chartered Bank, Hong Kong, completed the first renminbi non-deliverable interest rate swap transaction in the market in August with another bank for a three-year tenor. 

According to Michael Bass, global head of rates and foreign exchange at Standard Chartered Bank, "Hong Kong, as an international finance center and its unique role as a springboard for China financial markets, has a huge potential to be an offshore renminbi trading center."

The role of offshore NDFs has some import in the China finance market as the valuation of the renminbi continues to remain static despite calls from the United States and other nations to loosen it from the dollar. Last summer, the sudden loosening of the value of the yuan sent foreign bankers scurrying to secure their offshore NDF contracts.

In August, the Chicago Mercantile Exchange started trading Chinese renminbi futures working with Standard Chartered Bank and HSBC.  These two banks serve as the first market makers. As market makers the banks will provide transparent and competitive markets for renminbi futures contracts.

Recently the issue of "onshore" NDFs came into question.  It was thought that some banks in China were writing contracts for NDFs in local banks.  However, according to an official at Standard Chartered Bank, commenting on ChinaForum.com, "We understand that no standalone NDF transactions are allowed onshore. However, some local banks can offer RMB structured products, in which NDF is embedded, under the approval of SAFE. Under the current regulation, banks can do onshore forward with net settlement but the documents should be same as gross settlement's."

Watch the offshore NDF renminbi market as the Chinese currency evolves. So long as the official position is to keep the currency fairly inflexible, this hedge tool will remain popular.

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