CNH Tracker-China's yuan trade settlement flourishes despite FX volatility

Thu Mar 27, 2014 3:40am EDT

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By Michelle Chen
    HONG KONG, March 27 (Reuters) - Turbulence in China's
foreign exchange market and a sharp reversal in yuan strength
haven't dented demand for the currency in trade settlement. On
the contrary, it has flourished. 
    That suggests genuine demand from Chinese companies and
their trading counterparts to switch trade to the yuan taking a
bigger role than speculators trying to squeeze out a better
margin by punting on the currency.
    China's cross-border trade settled in yuan amounted to 550.2
billion yuan ($88.6 billion) in January and 437.8 billion yuan
in February, accounting for 23.5 percent and 28.6 percent,
respectively, of total trade.
    The February numbers are particularly significant as that
growth in trade came at a time when the yuan fell sharply after
a massive campaign engineered by the People's Bank of China
(PBOC) to shake out hot money.   
    The "redback" has lost 2.6 percent against the dollar since
the beginning of the year, wiping out almost all the gains it
eked out in 2013 when its emerging market peers wilted in the
face of a resurgent dollar.
    As the yuan's drop reverberated in offshore markets and
sparked a shakeout in leveraged currency bets, the percentage of
trade denominated in the yuan emerged unscathed, indicating
China's drive to internationalise its currency remained intact.
    Though absolute yuan transactions fell from a record high
seen in December as the world's second-largest economy lost some
growth momentum, the percentage of yuan settlement in the first
two months was much higher than the 18 percent it comprised in
China's total trade in 2013.
    "Investors are increasingly attracted by the offshore
renminbi's stability relative to other emerging market
currencies. The introduction of more two-way variability since
February should not change this fundamental view," Standard
Chartered analysts said.
    The volatility in the currency may only end up fuelling more
participation by Chinese companies, especially
small-and-medium-sized enterprises (SME), in the cross-border
trade-settlement scheme to avoid currency mismatch. 
    That will also boost the usage of yuan products, including
deliverable forwards, non-deliverable forwards and offshore yuan
loans, which companies rely on to reduce foreign exchange risks
and save costs.  
    A survey conducted by Standard Chartered revealed that
Chinese corporates, whether located onshore or offshore, lagged
Hong Kong corporates and multinationals in using yuan and yuan
products in international trade.
    Many Chinese exporters did not use financial instruments to
hedge currency risk due to the yuan's one-way rise of more than
30 percent since the 2005 revaluation. However, the recent
reversal of yuan movements should be a lesson.
    Corporates have proceeded to take on various hedging
strategies to mitigate the accompanying increase in exchange
rate volatility following the widening in the daily trading band
on March 15, said Nathan Chow, an analyst at DBS Bank in Hong
Kong.
    As more Chinese companies adopt the yuan in settling trade,
its path to becoming a dominant international currency for trade
will only quicken with some market watchers optimistic about the
time frame.    
    "Last year, we reaffirmed our belief that the renminbi will
be fully convertible by 2018, but the sheer scale and speed of
reform now leads us to believe that China can achieve this by
2017," Stuart Gulliver, group chief executive at HSBC
  said in a forum in Hong Kong on Thursday.
           
    WEEK IN REVIEW:   
    * Britain and China will sign an agreement next week to set
up the first clearing service for renminbi trading outside Asia,
putting London in a prime position to offer yuan trade business
in Europe. 
    * Industrial and Commercial Bank of China (ICBC)
 , the world's largest bank by assets, said
on Tuesday it has been approved by National Bank of Cambodia as
a clearing bank for the yuan in the country. 
    * China's yuan fell back behind the Swiss franc to rank as
the eighth most-used world payment currency in February, likely
due to the seasonal effect of the Lunar New Year, global
transaction service organisation SWIFT said on Wednesday.
 
    * China's ambitions to internationalise the renminbi are
likely to be a "seismic event" for global markets, leading to
large capital flows and perhaps a new reserve currency, Reserve
Bank of Australia (RBA) Deputy Governor Philip Lowe said.
   
    
   CHART OF THE WEEK: 
   China's cross-border trade settlement denominated in the yuan
has been growing rapidly and its percentage in China's total
trade is climbing: link.reuters.com/vys87v
        
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CNH Tracker-Offshore yuan products under scrutiny after sharp
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($1 = 6.2094 Chinese Yuan)

 (Editing by Jacqueline Wong)
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