Establishing a Foreign Exchange Futures Market in China

IMF Working Papers, November 12, 2021

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Title: Establishing a Foreign Exchange Futures Market in China
Authors: Zhongxia Jin, Yue Zhao, Haobin Wang
Date: November 12, 2021
Purpose: Assess the case for developing an FX futures market in China to support the economy's transition toward a more flexible exchange rate and to meet growing hedging needs associated with greater exchange rate fluctuations.
Context: OTC FX derivatives markets already exist in China, but a standardized FX futures market is absent and proposed to offer critical complementarities through standardized products, greater transparency, and centralized oversight.

Research approach: Analyze the impact of establishing FX futures markets on spot market volatility using data from major emerging market economies.
Key empirical result:
- An FX futures market is not empirically associated with an increase in spot market volatility; in some cases, it is associated with a decrease in spot market volatility.

Market advantages highlighted:
- Standardized products
- Greater transparency
- Centralized oversight
Target beneficiaries:
- Small and medium-sized enterprises (SMEs) with hedging needs
- Regulatory authorities seeking enhanced regulatory efficiency

Main recommendation:
- Substitute the inefficient documentation requirement of underlying exposures with a new set of market-oriented measures for the purpose of prudent regulation.
Intended outcome:
- Facilitate a well-functioning FX futures market that satisfies hedging demand while maintaining prudent oversight.