ABN Amro Holding, Credit Suisse First Boston and ING Groep said they planned to start offering derivatives that gave Chinese companies protection against fluctuations in currencies, the first overseas banks to gain such access in China, reported Shenzhen Daily on Wednesday.

Ten banks received licenses in the past three months to trade derivatives as they bid to offer a full array of banking services in the world's seventh-biggest economy.

The Chinese Government introduced new rules March 1 enabling overseas banks to trade derivatives directly with Chinese companies, which account for 7 percent of global trade and need to hedge their risks.

Chinese banks traded a record US$151.1 billion in currencies last year, according to the Shanghai- based China Foreign Exchange Center.

"It's ground breaking legislation that clarifies what's allowed,'' said Paul Calello, chairman of Credit Suisse First Boston in Asia about China's new derivatives market. "The legislation previously allowed for hedging activity only for derivatives. The new legislation allows for asset-related derivatives in credit, in fixed income and in foreign exchange, as well as hedging instruments.''

Credit Suisse would start trading currency derivatives as soon as this month, spokesman John Gallagher said. ING also plans to have its China derivatives business operating by the end of this month, said Sheel Kohli, ING's Hong Kong-based spokesman.

ABN was "good to go as of this month'' to start trading currency derivatives in China, Jamie McWilliam, Asia-Pacific head of derivatives marketing at ABN Amro in Hong Kong.

Derivatives are financial contracts derived from and tied to the value of debt or equity securities, currencies, commodities or other assets. The products can be used to hedge against or speculate on future price fluctuations.

Bank of Tokyo-Mitsubishi, Citigroup Inc., HSBC Holdings, Industrial Bank of Fujian, Mitsubishi Tokyo Financial Group Inc., Mizuho Financial Group Inc. and Standard Chartered were among the 10 banks to receive licenses to trade derivatives in China last month. Deutsche Bank AG said it received approval.

JPMorgan Chase & Co. and nine other foreign banks applied for licenses and are waiting for approval from Chinese regulators.

Bankers say there is currently no data available on the size of China's derivatives market. McWilliam at ABN Amro estimates revenue generated from China's interest rate derivatives market is currently about US$500 million a year and growing.

The banks plan to expand their business from foreign currency hedging, through interest rate swaps to credit derivatives such as commodity and equity derivatives. The banks will not be offering local currency products.

"This opens the way for a slice of a much bigger pie down the road,'' Fraser Howie, an author of two books on China's stock markets and a former derivatives trader at Morgan Stanley.

"By allowing overseas banks to trade derivatives the Chinese Government will be able to watch, learn and then regulate a market that was previously opaque to them.''

The combined value of global trading in interest rate, stock index and currency contracts was US$304 trillion in the second quarter, 12 percent more than in the first quarter, said the Swiss-based Bank for International Settlements in September.

Average daily trading in the Chinese yuan against other currencies totalled US$600 million last year, an increase of 54 percent from 2002, according to figures on the Web site of the China Foreign Exchange Center. China's share of world trade has tripled in the past decade to about 7 percent, and the nation is the world's third-largest importer.

(Shenzhen Daily/Agencies)