| HONG KONG/SINGAPORE, March 26
HONG KONG/SINGAPORE, March 26 Turbulence in
Chinese financial markets, reflecting growing worries about
investing in the country's assets, could slow the yuan's rapid
emergence as a major international currency.
Over the past five years, the yuan has gone from being a
thinly traded currency to a major one for trade settlement,
retail and institutional investment and arbitrage activity. A
host of financial and commodity linked derivatives are tied to
Analysts said two changes this year in Chinese policy have
highlighted risks that could slow down the yuan's march towards
internationalisation: the widening of the yuan's daily trading
band and a toughening of Beijing's attitude towards defaults.
The People's Bank of China (PBOC), the central bank, this
month doubled the daily permitted trading band for the yuan to 2
percent from 1 percent either side of a reference rate. It also
pushed the currency lower in a bid to shake hot money out of the
market to make clear the yuan is no longer a one-way upward bet.
The shake out saw the yuan fall at the end of last week to
its lowest level in a year, marking a decline in 2014 of almost
3 percent - an unusually sharp move for the currency that wiped
out all of 2013's gains.
Beijing has also indicated it will no longer automatically
bail out companies that default on their debts, turning on its
head the nature of credit risk in China.
The country recorded its first default on a domestic bond
earlier in March, after which Premier Li Keqiang said defaults
in some cases "are hard to avoid."
Investors said that while the yuan's importance as an
international currency would over time match China's economic
rise, the currency and debt developments could slow down how
quickly the yuan becomes used internationally, especially if the
"It is not necessarily a roadblock to yuan
internationalisation," said Ngan Kim Man, head of RMB business
strategy and planning at Hang Seng Bank, since eventually
Beijing intends to allow the currency to be fully convertible on
the capital account anyway.
"Some investors are yet to be adaptive to the new situation
and their pessimistic sentiment will continue for a while."
More than a trillion yuan ($160 billion) in bank deposits
and money market instruments circulate within Hong Kong's
banking system. Most is trade related, but some is positioned to
take advantage of the higher onshore yields and a currency that
has gained more than 30 percent since a landmark revaluation in
Deposits globally outside mainland China total more than a
trillion yuan, up from just a few million yuan five years ago
before the start of China's internationalisation drive.
Investors said yuan internationalisation could slow as
losses incurred on yuan-related products mounted and investor
appetite for them waned.
"In the near term, the fall of the yuan is likely to curb
investors' interest in yuan products," said the treasurer at a
Chinese bank in Hong Kong.
Most of the products were sold betting on yuan appreciation,
a reasonable bet since the currency has risen steadily since the
2005 revaluation. The sudden drop in the yuan has put these
products under pressure.
"These are leveraged products which were originally designed
to hedge FX risks for exporters, yet they have been sold to
investors without hedge demand as investment products."
REGULATORS START TO FRET
Another reason for pause is that regulators in South Korea
and Taiwan have flagged potential risks associated with a more
volatile yuan by looking into the rapid rise of yuan deposits in
their banking systems.
Yuan deposits in South Korea, via structured products, have
soared eight-fold since September to $7.56 billion at the end of
January, prompting the Korean central bank and financial
regulator to inspect the units of four foreign banks.
Taiwan's financial regulators are likewise checking seven
banks to see if they properly advised clients about the
potential risks of currency investments after receiving
complaints about losses incurred on structured products due to
the yuan's fall.
Given that exposure to the yuan is small relative to the
Korean and Taiwanese banking systems, regulators are more likely
to be concerned about investor losses, especially retail
investor losses, rather than any systemic risk these exposures
Regulators in the two biggest offshore yuan centres - Hong
Kong and Singapore - have not expressed concern about the rise
of yuan deposits in their banking systems. Both said they had
not received any complaints from investors about losses on
To be sure, analysts say longer-term pressure on the yuan is
upwards, so the currency's decline so far this year is likely to
Every country in Asia counts China among its top three
trading partners, helping to explain Beijing's strides in
persuading them to conduct trade in the yuan.
The dollar's share in settling trade within Asia fell to
below 80 percent as of September 2013 from more than 90 percent
in January 2012, SWIFT, an industry body that tracks trade
Kevin Tay, the Singapore-based regional chief investment
officer of wealth management at UBS, argues the outlook for the
yuan is clear given China's current account and trade surpluses,
currency reserves of $3.8 trillion and low foreign debt.
"If you focus on that, there is absolutely nothing you
should be worried about with regards to where the yuan is going
to be moving to," Tay said.
(Additional reporting by Saikat Chatterjee in HONG KONG and
Faith Hung in TAIPEI; Editing by Nachum Kaplan and Neil Fullick)