Dennis Wan, JPMorgan's managing director and head of sales for China credit and rate markets, sees potential in China's derivatives business. However, he cautions that risk management is necessary as the nation's legions of small to medium-sized businesses grow. He shares his views on the current derivatives business in China.
Tell us about JPMorgan's derivatives market coverage in China?
Wan: JPMorgan has been conducting business in China since the late 1980s, providing risk-management services to clients in China through the local banks as intermediary. Due to the stringent local regulations, we're restricted to, on the one hand, working in close partnership with the local banks and, on the other hand, working with corporate entities to structure the appropriate derivative solutions for managing their interest rate and currency exposure.
Do you think the China derivatives business is the next big thing?
The notional value is almost impossible to quantify. However, just look at the number of corporate entities in China and the amount of international trade activities that are transacting there daily. If you assume all of these corporate entities are to hedge their currency positions, it will create significant business opportunities for the market.
What type of potential?
Banks like JPMorgan have been discussing internally on how to develop local currency derivative products in China. The demand is huge.
Renminbi forwards, for example, is the simplest kind of derivatives. I expect China will open up and allow more banks to provide this kind of simple hedging products. The second stage of development will be in products like cross-currency swaps, which enables users to hedge medium- to long-term liabilities.
What about onshore forwards?
For onshore forwards, the next stage of development will be for the mainland to open these up to more PRC banks and foreign banks with onshore branches. Currently only BOC and ICBC are authorized to offer RMB forwards on trade-related activities.
If you were to caution investors about derivatives, what would it be?
I think the market has learnt its lessons, which is a good thing.
Ideally, each company should establish a risk-management programme with well-defined objectives. Equally important is good internal control procedures, which allows for regular reporting, position monitoring and risk-profile fine-tuning. These procedures ensure that the risk-management programme is executed appropriately in accordance with the objectives.