Major exchanges to offer offshore contracts in Hong Kong

Internationalization of the yuan will get a major boost on Monday when derivatives-exchange operator CME Group Inc begins offering foreign-exchange futures contracts in Hong Kong denominated in the Chinese currency.

US-based Chicago Mercantile Exchange's offshore futures products deliverable in yuan will come in two forms - a three-year contract worth up to $100,000 and a three-year contract for up to $10,000. The varying price ranges will attract a diverse client base that includes hedge funds and retail traders, analysts have said.

KC Lam, the Singapore-based head of foreign-exchange products in Asia for CME, said the status of China - as the world's second-biggest economy, No 1 exporter and No 2 importer - means growing global demand for its currency.

He said CME's decision to launch the yuan-deliverable offshore contracts was "primarily commercially driven".

Typically, a contract for any yuan-denominated derivative has required the seller to deliver in US dollars, with payment to be settled in yuan by the buyer upon maturity of the contract.

The yuan is already used for business transactions in multiple offshore locations, including Hong Kong, Singapore and Australia.

"Hong Kong is the choice for the offshore launch due to its thriving commercialism, and it is the doorstep of China," Lam said.

To reach the next stage of the currency's internationalization, trading in yuan will need to become truly global and accessible to a diversified clientele, Lam said, pointing to hedge funds, proprietary trading firms, banks and corporate and retail accounts.

Bank of China Ltd, a key player in promoting global business in yuan, formed a strategic alliance with CME Group in March 2012 aimed at clearings and settlement, offshore services involving the Chinese currency and futures trading. The US-based company operates the Chicago and New York mercantile exchanges as well as the Chicago Board of Trade.

BOCI Commodities and Futures Ltd, a wholly owned subsidiary of Bank of China, is a CME clearing member. The New York branch of Bank of China is one of CME's settlement banks and collateral custodians.

Bank of China Hong Kong Holdings, a BOC subsidiary that is the city's sole yuan-clearing bank, is the official futures-market maker for CME in offshore trading of the yuan.

"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 the Chinese government has loosened its grip on the country's capital account, foreign investors, manufacturers and traders have had greater incentive to hold yuan for investment or payment settlements, according to Gregory Chin, head of China research at the Centre for International Governance Innovation, a think tank in Canada.

"The progress in advancing Hong Kong as an offshore RMB [renminbi or yuan] market, and the steps that Beijing has been taking to allow for greater international use of the RMB are part of the consideration behind the CME's move," he said.

Yuan-denominated settlements in cross-border trade increased 41 percent last year from 2011, while investments settled in the currency surged 153 percent, according to the People's Bank of China.

But yuan transactions in the United States 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.

In early February, the Chinese government selected Industrial & Commercial Bank of China Ltd, the world's biggest bank by market capitalization, as the clearing bank for offshore yuan business in Singapore.

The Bank of England and the People's Bank of China announced last week that they plan to sign an agreement on a three-year currency swap as London seeks to become an offshore hub for yuan trading.

yuweizhang@chinadailyusa.com