China is planning to allow onshore trading of yuan options in the first quarter of next year to offer companies a new tool to hedge against foreign-exchange risks, sources said yesterday.

The country's foreign-exchange regulator may unveil rules on yuan option trading on the Chinese mainland early next year after soliciting opinions of commercial banks on the plan, said people familiar with the matter.

The options will grant holders the right, not the obligation, to sell or buy a certain amount of the currency at a specific date with a pre-set price. The Chicago Mercantile Exchange in the United States started to trade yuan options in August 2006.

"That's a signal that China is stepping up developing its onshore yuan market and helping domestic firms better hedge against risks," said Kevin Zhu, a trader at the Bank of China. "With cross-border yuan settlement growing more popular, there's a strong demand for yuan-backed derivatives."

After a year of trial, China in June expanded a program on yuan-backed cross-border trade settlement to 20 provinces and municipalities from Shanghai and four cities in south China's Guangdong Province.

China in 2007 started currency swaps on its interbank market, allowing firms to swap their traded currencies during a specific period.

The Chinese currency last week rose 0.12 percent to 6.66 yuan per US dollar, the biggest weekly gain in a month, amid speculation that the People's Bank of China may increase interest rates in coming months to rein in inflation.

Trading of yuan options will likely start after the week-long Spring Festival holiday, which starts on February 3, sources said.

In August, China allowed yuan assets accumulated overseas through cross-border trade settlements and central bank swaps to invest in the mainland's interbank market. Yuan clearing banks in Hong Kong and Macau, overseas central banks that have currency swap deals with the mainland and overseas banks involved in the yuan-backed cross-border trade settlement are allowed to invest in the interbank bond markets within an investment quota set by PBOC.