| HONG KONG, June 19
HONG KONG, June 19 Offshore yuan trade is
rapidly surpassing the once-dominant non-deliverable currency
forwards market in the Chinese currency as traders gravitate to
its improved price discovery and liquidity.
Beijing's push to promote the usage of yuan in global trade,
and the promise of further market reforms, will likely make
deliverable offshore yuan more popular in time to come.
For years, the non-deliverable currency forwards market in
yuan traded in the global currency markets from Hong Kong to New
York represented the only way to bet on the Chinese economy.
While that changed with the emergence of the deliverable
offshore yuan markets in the second half of 2011, not even the
most pessimistic of market watchers predicted such a swift
decline for the NDF market.
A report this week from London, the world's biggest foreign
exchange trading hub, showed for the first time how quickly the
offshore yuan currency market has overtaken its NDF counterpart
in recent months.
Based on a detailed FX survey, the report by the City of
London concluded that trading in deliverable products for the
yuan exceeded that of NDFs for the first time in 2013.
That rise in market share is nothing short of meteoric,
considering that the offshore yuan market has been in London
only for the last three years.
Banks in Hong Kong and Singapore have shared anecdotal
evidence of the rise in deliverable yuan volumes on their
platforms, but London's report is the first of its kind in its
To understand the reason for that decline, it is necessary
to understand the reason for the growth of the NDF markets in
the first place.
The NDF market began to emerge in the early nineties focused
on the emerging market currencies in Latin America and quickly
spread to Asia and Eastern Europe.
Because NDF trading was primarily used as a means to hedge
exchange rate risk for non-convertible currencies, market growth
has been greatest for currencies of countries with increasing
economic importance and strong capital controls such as China.
At the peak of its popularity in 2010, NDF trading in the
yuan or renminbi exceeded trading on the mainland by more than a
ratio of two to one as institutional investors ranging from
hedge funds to sovereign wealth funds dabbled in these markets
to gain exposure to Chinese currency risk.
But the advent of the CNH market in July 2010 changed that.
For the first time, investors could now settle their trades
in yuan without having to worry about exchange rate risk or
depend on the erratic fixings by the People's Bank of China on
which these contracts were settled.
As the quality of prices improved along with the underlying
liquidity in the CNH markets, more market players gravitated
towards the deliverable markets in the currency.
While volumes grew quickly in offshore yuan trade, the NDF
market remained attractive for some large funds with evidence
from as recently as 2013 confirming the offshore deliverable
markets in Hong Kong and Singapore moving in line with NDFs.
But the London data shows how quickly the rise of the CNH
markets have come at the cost of NDFs.
The overall yuan market in London expanded by more than half
from 2012 to $25 billion, but the rise was led by growth in
deliverable yuan currency products, estimated at $18 billion,
while NDF trade shrank to $6 billion.
In 2011, the total market size was about $10 billion with
the non-deliverable market comprising more than $8 billion.
This year, Beijing has allowed for greater two-way
volatility in yuan trade as part of market-opening reforms, but
its midpoint fixings have defied global market moves, making it
difficult for traders to rely on NDF contracts as a barometer
for market-based pricing.
It may be too early to sound the death knell for the NDF
market given that China is still far from full capital account
convertibility, but one thing seems certain - the decline of NDF
trade appears inevitable.
WEEK IN REVIEW:
* China's Bank of Communications Hong Kong
branch completed its sale of 2 billion yuan ($322.11
million)three-tranche Formosa bonds in Taiwan, according to a
term sheet seen by Reuters. The book reached 3.2 billion yuan
with orders from almost 60 accounts.
* Singapore plans to launch a facility to provide overnight
yuan liquidity as trade transactions using the currency rise.
The city-state has also been allowed to conduct cross-border
yuan transactions with eligible corporates and individuals in
the Suzhou Industrial Park.
* Yuan deposits in Taiwan rose to 290 billion yuan ($46.71
billion) by the end of May, up 0.88 percent from a month
earlier. Yuan deposits in South Korea rose by a net $1.42
billion to a record $11.33 billion mainly on increased
investment by local institutions in China.
* China will allow free trade zones to be established only
if they can be replicated elsewhere in the country, a senior
commerce ministry official told the state news agency Xinhua.
* China specified ownership limits for overseas investors
buying shares in companies listed in China via the Hong
Kong-Shanghai stock connect scheme. A single foreign investor
cannot hold more than 10 percent of a company, while the maximum
combined holdings of all foreign investors in a single Chinese
listed firm will be 30 percent.
CHART OF THE WEEK:
RMB deposits in Hong Kong: link.reuters.com/vyc25t
Despite the Chinese currency's weakness in recent weeks, yuan
deposits in Hong Kong have grown in recent months with total
deposits edging towards the 1 trillion yuan mark.
CNH Tracker-More volatile yuan sparks demand for derivatives
China Construction Bank clinches deal for renminbi clearing in
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
($1 = 6.2090 Chinese yuan)
(Additional reporting by Michelle Chen; Editing by Jacqueline