ABSTRACT
This chapter is a study of the development of a particular sector of the Chinese financial industries, namely markets for over-the-counter (OTC) derivatives, focusing especially on FX markets. OTC is a term used in juxtaposition to exchange traded. That is to say that OTC derivatives are generally tailor-made products that for the same reason are not traded (as standardised products) on market exchanges but instead transacted in interbank markets, through negotiations between parties, meaning either two banks or a bank and a client.There is hence no open exchange and no market maker involved in such transactions. Derivatives markets generally form arguably one of the most knowledge-and technologyintensive sectors in the financial industry as they rely heavily on pricing models and information and communication technology (ICT). We have all heard stories from developing countries about, for example, state-of-
the-art hospital equipment being donated to an area where there was no stable electricity supply,which made the equipment useless.Without wanting to stretch that analogy too far (China’s economy and financial markets have developed much too far to do that), something similar applies to the topic of this chapter.We are here going to study the use of sophisticated financial know-how – namely the pricing models used for creating and valuing derivatives – in a setting which does not fulfil most of the requirements for use of that same know-how. Unlike the example with hospital equipment, the requirements here have little to do with physical infrastructure, but with cultural, political and institutional infrastructure, so the question is not whether derivatives as a technology can function or not in a material sense. Nevertheless, there is still a very substantial conflict between the technology and the environment in which the technology is being implemented as derivatives pricing models, for example, presuppose what in crude terms could be called a liberalised
financial market. However, the Chinese markets do not fully fulfil such criteria.This means that derivatives provide a glimpse into the complexities and inherent conflicts of Chinese economic development and global integration. Several of the conflicts, we shall see, hinge on different notions and manifestations of risk. Derivatives are financial instruments that make it possible to hedge against risks.
