Yuan trading would get boost from SDR inclusion

Reuters/Hong KongThe volume of Chinese currency traded in the offshore market has risen sharply in the past year, after more than 10 offshore yuan hubs were set up and more players switched to using it for payments and settlements. Daily transactions of the so-called CNH on currency trading platform EBS have increased by over 50% in the last six months and by approximately 200% in the past year, according to Jessica Roberts, EBS head of CNH. The yuan is now one of EBS’ top five traded currencies, whereas it was in the top 15 in 2013. The majority of yuan trading volumes continue to be in Asia, Roberts said. Traders estimate volumes of CNH spot are around $20bn a day, almost doubling the level at the beginning of the year, and if yuan forwards and other derivatives are included, could reach $40bn. The flourishing CNH FX market comes at the expense of the yuan non-deliverable forwards (NDF) that used to be popular among corporates and speculators with limited channels to hedge yuan currency risk. NDF contracts, betting on the future performance of the yuan and settled in US dollars, are not an ideal hedging tool due to huge basis risk - the difference between the actual yuan spot rate and the midpoint fixing set by the central bank. Market participants say the yuan is likely to receive a stronger boost as the International Monetary Fund (IMF) is considering including the “redback” in its SDR basket and is expected to make a decision by the end of this year. Finance chiefs from the Group of Seven industrial nations agreed on Friday that including China’s renminbi in the International Monetary Fund’s currency basket is desirable, but a technical review must be completed first. Getting the RMB into the basket is the next step in its internationalization and “may well provide the next leg up in volumes as central banks accumulate renminbi within their reserve portfolios and confidence in the CNH grows,” said Simon Winn, Asian head of sales at EBS. This will lead to higher trading volumes and spread compression between bid and ask prices, thanks to increased liquidity and market transparency, Winn said. So far, more than 50 foreign central banks have started to use the yuan or keep it as part of their foreign reserves, according to industry estimate. An HSBC survey in March that drew responses from 72 central banks showed the yuan could account for 2.9% of global reserves by the end of 2015 and 12.5% by 2030. A formal review of the SDR basket – which now includes US dollar, euro, sterling and yen – will be held in October-November and any changes made from that will come into effect in January. Standard Chartered Bank sees a 60% chance the yuan will be included this year.