Major US exchange to deliver yuan offshore contracts in HK
The internationalization process of the yuan has been given a major boost by the Chicago Mercantile Exchange.
On Monday, the owner of the world's biggest futures exchange will launch deliverable offshore yuan futures in Hong Kong by offering three-year contracts worth either $100,000 or $10,000. These are price ranges that will attract both hedge funds, retail traders and a generally more diversified client base, analysts believe.
KC Lam, the Singapore-based head of foreign-exchange products in Asia for the CME Group, said China's economic status - as the world's second-largest economy, the largest exporter and second-biggest importer - will lead to a growing global demand for its currency.
"Our decision to launch the USD/CNH (renminbi traded offshore) foreign exchange futures contracts is primarily commercially driven," Lam said.
The yuan has been used for business transactions in multiple offshore locations including Hong Kong, Singapore, and Australia. "Hong Kong is the choice for the offshore RMB launch due to its thriving commercialism and it is the doorstep of China," Lam said.
To move to the next stage of yuan internationalization, trading in the currency needs to become global and accessible to a diversified client base, "across hedge funds, proprietary trading firms, banks, as well as corporate and retail accounts," Lam said.
Bank of China - a key Chinese player in terms of promoting global business in yuan - formed a strategic alliance with the CME Group in March.
The primary focus of this alliance was clearing and settlement, offshore yuan services and futures trading.
BOCI Commodities and Futures Limited, a wholly-owned subsidiary of Bank of China, is a CME Clearing Member. BOC's New York Branch has been selected as one of CME Group's Settlement Bank and Collateral Custodians.
Bank of China Hong Kong Holdings, BOC's subsidiary and the city's sole yuan-clearing bank, is CME Group's CNH futures official market maker.
"To many of our newer member firms, having Bank of China as our Settlement Bank and Collateral Custodian will provide them with an opportunity to establish a banking relationship with a familiar name in their region," Lam said.
As Beijing has loosened its grip on the capital account, foreign investors, manufacturers, and traders have more incentive to hold the yuan for either investment or settlement, Gregory Chin, a senior fellow and China Research Chair at the Canada-based think tank Center for International Governance Innovation, said.
"The progress in advancing Hong Kong as an offshore RMB market, and the steps that Beijing has been taking to allow for greater international use of the RMB are part of the considerations behind the CME's move," said Chin.
Yuan-denominated settlements of cross-border trade rose 41 percent last year from 2011 and investments settled in the currency surged 153 percent, according to the People's Bank of China.
But yuan transactions in the US declined 38 percent in December from November, making 2012 a flat year in terms of the use of the Chinese currency in the world's biggest economy.
Daniel Hwang, chief currency strategist at Gallant Capital Markets in New York, predicts US payments in yuan will increase this year.
Earlier this month, China named Industrial and Commercial Bank of China, the world's largest bank by profit and market capitalization, as the clearing bank for offshore yuan business in Singapore.
Last week the Bank of England and the People's Bank of China said they plan to sign a deal on a three-year currency swap as London pushes to become an offshore hub for yuan trading.
But Chin, whose research focuses on international monetary issues, said the RMB still has a long way to go before it challenged the dollar as the global reserve currency.
"The point is not whether the RMB will supplant the dollar as the de facto global currency in the immediate future," he said. "The question is whether we are seeing concerted steps forward in gradually expanding the international use of the RMB."
