Foreign Trade Futures Market Needs To Be Accelerated To Promote Steady Growth Of Foreign Trade

International experience shows that the exchange rate volatility of developed countries has significantly reduced the growth of foreign trade before 1985; after 1985, the rapid growth of the foreign exchange derivatives market has made the developed countries have many exchange rate hedging tools, and the growth of foreign trade is no longer negatively affected by exchange rate fluctuations.

The over-the-counter foreign exchange derivatives market in China is relatively small in scale compared with foreign trade, and the long-term settlement and sale of foreign exchange accounts for only about 10% of the import and export scale.

The study shows that exchange rate volatility has significantly affected the growth of China's foreign trade, and the current foreign exchange derivatives market can hardly meet the hedging function of the real economy.

Small and medium-sized foreign trade enterprises can only adopt passive measures such as receiving short lists, which has affected the steady growth of China's foreign trade.

Listed foreign exchange futures can provide enterprises with more risk avoiding tools, and the standardization and high liquidity of foreign exchange futures can reduce the risk hedging cost of enterprises, promote the steady growth of China's foreign trade, and give full play to the financial innovation's ability to serve the real economy.

In May 2014,

Issuing some opinions on promoting the steady growth of foreign trade, clearly put forward "encouraging financial institutions to develop hedging products that meet the needs of the development of the real economy and help enterprises effectively avoid exchange rate risks".

In June 2014, the people's Bank of China issued guidance on implementing the support for stable growth of foreign trade, put forward a rich exchange rate hedging tool, "increased innovation in foreign exchange products, increased foreign exchange market trading varieties, studied innovation of foreign exchange options combined products and futures business, formed a combination of spot, forward, futures, options and other products, and combined product products of exchange rate products and interest rate products".

Speeding up the construction of China's foreign exchange futures market, providing more risk prevention tools for enterprises, is conducive to the stability of foreign trade, and is also in line with the spirit of financial innovation and serving the real economy.

Beijing Financial Derivatives Research Institute Liu Wencai Zhu Junjun

I. Theoretical Framework for foreign exchange derivatives to promote stable growth of foreign trade

Volatility reduces foreign trade, foreign exchange derivatives hedging against the risks of exchange rate fluctuations, thereby promoting foreign trade growth.

The import and export trade is affected by a series of factors, such as gross national product, inflation and exchange rate fluctuations in two countries.

The import and export trade changes caused by the first two macro factors are unavoidable, and the risks brought by exchange rate fluctuations can be pferred out of the foreign exchange derivatives market, so that enterprises can not be disturbed by exchange rate fluctuations.

Exchange rate fluctuations affect the import and export trade directly and indirectly from two channels.

In the direct channel, the export of enterprises receives foreign exchange or imports to pay foreign exchange, and the fluctuation of exchange rate leads to changes in the income or expenditure calculated in the local currency, so that the prospect of enterprise earnings is faced with uncertainty, so that those risk averse enterprises reduce import or export.

In indirect channels, enterprises will assess the costs and benefits of foreign trade and domestic trade.

Once the fluctuation of exchange rate makes the enterprises have no stable profit prospects in foreign trade, enterprises will change their output structure, business location, trading partner countries or trade modes, such as the production of domestic sales products, the relocation of factories to foreign countries, and the development of trade and trade in processing trade with other countries with stable exchange rate.

These decisions made by enterprises facing exchange rate fluctuations will reduce the scale of foreign trade of a country.

Enterprises using foreign exchange futures can hedge the risk of exchange rate fluctuations, thereby increasing import and export trade.

Foreign exchange futures and foreign exchange forward can also lock in a certain period of exchange rate.

For example, when an enterprise signs a foreign trade export contract for 3 months, it can lock in the exchange rate risk after 3 months by selling the corresponding amount of US dollars to RMB foreign exchange futures.

The foreign exchange futures contract is equivalent to selling the US dollar 3 months later at a fixed exchange rate.

In this way, no matter how the future spot exchange rate changes, enterprises will receive RMB funds after 3 months, and the exchange rate changes will no longer affect the profits of enterprises.

Enterprises can pfer exchange rate risk through foreign exchange futures market, so that enterprises can organize production in a relatively stable exchange rate environment, thereby increasing the scale of import and export.

Two.

International experience of derivatives in promoting foreign trade growth

Before 1985, the lack of sufficient foreign exchange derivatives made the exchange rate fluctuations significantly reduce the growth of foreign trade; after 1985, the developed countries' foreign exchange derivatives market developed matured, and exchange rate fluctuations no longer had negative effects on foreign trade growth.

In the developing countries, there is no mature foreign exchange derivatives market, and exchange rate fluctuations have reduced foreign trade growth.

The changes in the relationship between exchange rate fluctuations and foreign trade growth fully explain the growth of foreign exchange derivatives in foreign trade.

(1) before the development of the foreign exchange derivatives market, exchange rate fluctuations significantly reduced the growth of foreign trade.

In the early 70s of last century, countries began to allow the exchange rate to fluctuate slightly.

In 1973, after the collapse of the Bretton Woods system, the exchange rate between the major developed countries was re entered into a free floating stage.

With the intensification of exchange rate fluctuations, enterprises are facing more and more significant income uncertainty in foreign trade.

Before 1985, there was a lack of exchange rate hedging tools. Exchange rate fluctuations significantly reduced foreign trade growth.

According to the study of 50 countries or regions by Hudson and Straathof (2010), the exchange rate fluctuation increased by 1% before 1985, and the foreign trade of various countries would be reduced by 3.7%, and the decline was statistically significant.

More studies have yielded similar results, that is, exchange rate fluctuations cause enterprises to face income uncertainty. If there is not enough risk aversion means, enterprises will reduce foreign trade business (Clark, 1973; Ethier, 1973; Hooper and Kohlhagen, 1978).

During this period, exchange rate fluctuations had a significant negative impact on the growth of foreign trade.

The International Monetary Fund (1984) points out that not all countries have developed the foreign exchange derivatives market in this period, and the liquidity of foreign exchange derivatives introduced is limited. The cost of hedging risks is relatively high, and the hedging function of the foreign exchange derivatives market is limited to some extent.

(two) after the development of the foreign exchange derivatives market in 1985, exchange rate fluctuations will no longer reduce the growth of foreign trade in developed countries.

Exchange rate fluctuations affect foreign trade with people's intuition and logic.

After 1985, many studies found that the growth of foreign trade in developed countries was often independent of exchange rate fluctuations, or negative, but the negative correlation coefficient was very small.

This phenomenon is called "the mystery of exchange rate fluctuations and foreign trade growth".

As for the reason, in the late 80s of last century, the foreign exchange derivatives market gradually developed and mature, and the enterprises had a good tool to avoid exchange rate risk, so that exchange rate fluctuations no longer significantly reduced the growth of foreign trade.

Hudson and Straathof (2010) pointed out that the foreign exchange derivatives market began to develop in the late 80s of last century, and the position of foreign exchange swap market increased from US $250 billion in 1987 to US $19200 billion in 1997, which made it possible for enterprises to avoid risks more effectively.

In addition, the rapid development of electronic pactions, more enterprises can enter the foreign exchange derivatives market, making the exchange rate risk hedging cost of enterprises significantly reduced.

Straathof and Cali (2012) further test the hypothesis of "hedging tools to reduce the negative impact of exchange rate fluctuations" proposed by Wei (1999). It is found that the development of foreign exchange futures market at least reduces the negative impact of exchange rate fluctuations of 50%, and promotes the growth of foreign trade, making the exchange rate fluctuations in developed countries irrelevant to the growth of foreign trade.

The International Monetary Fund also has similar views.

In response to the request of the director general of the world trade organization, the International Monetary Fund (IMF) comprehensively studied the relationship between exchange rate fluctuations and foreign trade growth in 2004.

According to its research report, exchange rate volatility has not been found in Global trade, which has significantly reduced the growth of foreign trade. Even in some cases, the negative impact is small.

Exchange rate volatility is no longer the main consideration of policymakers in developed countries.

The rapid development of foreign exchange derivatives market in the past twenty years provides enterprises with a wealth of hedging tools for exchange rate risk, which may be the reason for the negative impact of exchange rate fluctuations.

In addition, the purchase and sale of multinational companies around the world partly offset the impact of different exchange rate fluctuations on the operation of the company.

(three) foreign exchange derivatives in developing countries are not active, and exchange rate fluctuations have significantly reduced foreign trade growth.

In developing countries, exchange rate volatility has been significantly reducing foreign trade growth.

From the empirical study of many developing countries in different periods, the exchange rate fluctuation has negative effects.

Among them, Kadir et al. (2013) pointed out that the cross exchange rate (US dollar to Japanese yen) significantly reduced the foreign trade scale of Malaysia's electric vehicles.

Many studies show that the growth rate of foreign trade in some countries has slowed down after the Asian financial crisis, which can be attributed to the increasingly volatile exchange rate fluctuations.

The study of Hayakawa and Kimura (2009) shows that the trade of Asian countries is more negatively affected by exchange rate fluctuations than other regions, and the extent of the impact is even greater than that of tariffs on foreign trade.

As for the reasons, Asian enterprises generally lack experience in foreign exchange risk avoidance. Besides, the proportion of processing trade between Asian countries is very large, and to a certain extent, it has amplified the impact of exchange rate fluctuations.

Why do the exchange rate fluctuations in developing countries significantly affect the growth of foreign trade, while those in developed countries do not? Hall et al. (2010) think that the backward financial market and financial infrastructure in developing countries are the main reasons, especially the lack of adequate exchange rate hedging tools for enterprises.

The difference between the developing countries and the developed countries in the development of foreign exchange derivatives market has resulted in the different effects of exchange rate fluctuations on the growth of these two countries' foreign trade.

Enterprises in developed countries can better use financial instruments to hedge exchange rate risks, so exchange rate fluctuations do not significantly reduce foreign trade growth, while developing countries lack foreign exchange rate hedging tools, making foreign trade growth negatively affected by exchange rate fluctuations.

Three, foreign exchange futures can promote stable growth of China's foreign trade.

Exchange rate volatility has a significant impact on China's foreign trade growth.

Most enterprises have only 3% export profit margins. They can only deal with foreign exchange risk passively and dare not buy long lists or large orders. Foreign exchange futures can help enterprises to lock in profits and improve business stability, thereby boosting the steady growth of foreign trade.

(1) China's foreign trade is significantly affected by exchange rate fluctuations, and the lack of sufficient depth of foreign exchange derivatives market is the main reason.

Exchange rate volatility has a significant impact on China's foreign trade.

China's foreign trade, like developing countries, is significantly affected by exchange rate fluctuations.

In recent years, all the literature has pointed out that the RMB exchange rate fluctuation significantly affects the growth of foreign trade, and many studies have been carried out from two angles: the rise and fall of the renminbi and the increase in exchange rate volatility.

The result shows that the appreciation of RMB is 1%, the decrease of China's exports is between 0.8% and 2.48%, the fluctuation of RMB exchange rate has increased by 1%, and the reduction of China's exports has ranged from 0.09% to 0.58%, all of which are statistically significant.

Our research has yielded similar results: the renminbi has appreciated by 1% compared to the US dollar, China's export trade has decreased by 1.53%, while the effective exchange rate of RMB has appreciated by 1%, China's export trade has decreased by 0.42%, the cross exchange rate has changed by 1%, and China's export trade has changed 0.24%.

In addition, the fluctuation of RMB exchange rate also has a significant impact on export trade.

The fluctuation of US dollar / RMB exchange rate increased by 1%, China's export trade.