Bank of China Halts Forex Swaps With UBS, BNP

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SHANGHAI—State-run Bank of China Ltd. has told UBS AG and BNP Paribas SA that it won't trade with them in China's local derivatives markets, amid broader investor concerns over Europe's debt woes.

The move is likely to have only a muted financial impact on the banks. Even if the halt applies beyond China's borders, Bank of China is a minor player in global funding markets, and the Europeans banks will still likely be able to access liquidity needed within China from others. But it underscores the uncertainty surrounding global funding markets and could present an image problem for the banks.

Bank of China told UBS and BNP Paribas that they reached the limits of their trading credit lines with the bank, according to one person familiar with the matter. It wasn't clear Tuesday how large the credit lines were. The lender notified the banks about its decision last week, while the halt began Monday, the person said.

Further details weren't available, and a Bank of China spokeswoman didn't return calls or emails.

The move comes as Beijing's leaders have offered verbal support for the European Union, saying they have confidence the nations can work through their problems. The China Banking Regulatory Commission, which oversees the nation's banks, didn't return calls.

The credit lines are used to fund the banks' trading in China's domestic market for currency-exchange and interest-rate swaps, which they buy and sell for clients or use to hedge their own risk.

Spokeswomen for UBS and for BNP Paribas declined to comment.

Several other European banks said Tuesday that their operations in the China swaps markets continued normally.

Bank of China's move comes despite public expressions of support for the European Union as worries over its financial health intensify. Last week, at a meeting of the World Economic Forum in the Chinese city of Dalian, China's Premier Wen Jiabao offered verbal support. "China believes the EU will be able to overcome its difficulties and China remains willing to expand its investment in the EU," Mr. Wen said. "We have on many occasions expressed our readiness to extend a helping hand."

Foreign banks last faced trouble accessing local funds in 2008, during the global financial crisis, when a number of Chinese lenders suspended foreign-exchange swap trading with some foreign firms. The move came as the CBRC publicly declared that foreign banks in China were in sound financial health.

China still accounts for only a small part of global banks' profits. BNP Paribas's China unit posted a net profit of $23 million last year, up from $12 million in 2009.

Last week, Moody's Investors Service put its rating on UBS under review for possible downgrade, following the revelation that one of its traders lost $2 billion following three years of trading that went undetected by bank risk officials. Moody's last week affirmed its rating on BNP Paribas but kept it under review for possible downgrade, citing weakness in Europe's bank-financing market.

The euro zone is struggling to contain a widening sovereign-debt crisis that is threatening its banking system. Standard & Poor's Ratings Services on Monday cut Italy's sovereign-debt rating by a notch, saying the nation's weak economic growth and fragile government coalition will make it harder to head off the growing crisis. Two French banks—Société Générale and Crédit Agricole—were downgraded earlier this month due to their exposure to Greek debt.

The Bank of China's move will likely have its largest impact on the Chinese market for foreign-exchange and interest-rate swaps, giving UBS and BNP Paribas one less potential partner in financial transactions hedging currency and rate risks. Bank of China is one of the most active banks in the Chinese foreign-exchange market, according to traders. China doesn't release detailed statistics on the domestic forex market.

China launched interbank trading of foreign-exchange swaps in late 2005. In a forex swap, two parties exchange currencies at the spot rate and agree to reverse the transaction at a future date based on the forward rate. The swaps market is a vibrant but small part of China's onshore currency market, which is strictly controlled by Beijing.

—Dinny McMahon in Beijing and Prudence Ho in Hong Kong contributed to this article.