China could turn crisis to its advantage

China should not fear the global crisis and instead should use the downturn as an opportunity to build from the inside out - that was the message coming from the FX Week China congress in Beijing last Wednesday (May 20).

No doubt the global financial crisis has reignited belief in the importance of risk management. The Chinese forex market experienced much of the same implications from the fallout of last Autumn's banking crisis as other parts of the globe, with concerns over counterparty risk and ensuing wider prices. Similarly, traders didn't fail to take advantage of the surge in volatility to generate profits, opined Xiao Fan Sun, head of trading in the global financial markets division at Bank of China.

However, there was a call to improve the processes surrounding derivatives so that local banks can independently analyse and price products. Yu Sun, deputy head of trading in financial markets at China Construction Bank, said the financial crisis gave the country's banks a better understanding of the derivatives market. When trading complex derivatives, for example, banks had been relying on data from foreign counterparties which, naturally, is highly risky.

Here lies an opportunity for local banks to hire counterparts that had been let go from foreign banks, he said. Once the skills have been obtained they can be applied to the renminbi derivatives market to improve its core capabilities and increase market-making capabilities for the country's banks.

To Peng, director-general in the current account management department at the State Administration of Foreign Exchange, said the foreign exchange regulator will give the country's banks more price-setting capacity as part of the government's efforts to move to a market-oriented yuan. It also plans to relax limits for rates offered by banks to customers.

Simultaneously, David Dollar, country representative for China at the World Bank, suggested the country use the current downturn to build infrastructure and the service sector. Freeing up capital for households through healthcare and pension reform, for example, will boost spend. With 75% of household funds typically spent a month, that's not an insignificant number for the country.

That said, and with the experience gained from the current global financial crisis, any move to develop should be measured and based on substance.

Comments? Email saima.farooqi@incisivemedia.com