Gimme the renminbi

An increasingly robust market for China's currency is backing CME's yuan futures launch

Gimme the renminbi


Foreign exchange traders in the US just got a new link between the world's most widely traded currency and what is expected to be its most formidable competitor. The Chicago Mercantile Exchange this week launched deliverable yuan-dominated futures, introducing a new product to the growing number of ways that the currency is traded in the US.

CME launched the product following a surge in renminbi deposits in Hong Kong. After a decline in redbacks flowing into the trading hub during 2012, reforms to the Renminbi Qualified Institutional Investor program, which allows offshore investors to buy certain onshore assets via the currency, have driven interest in holding the yuan abroad.

The CME product itself isn't groundbreaking. Bank of China allowed customers to start buying and selling yuan in the US in early 2011. The Hong Kong Stock Exchange has offered futures products similar to CME’s since last year, the primary difference being that CME’s standard futures contract lasts for three years, compared to one year in Hong Kong.

CME, which operates the Chicago Board of Trade, will allow for longer trading hours for such futures. Hungry US traders will be able to buy and sell the contracts while Hong Kongers sleep.

Demand for the product in the US should be somewhat tame, however. Investors serious about buying yuan futures will have already tapped the Hong Kong market, according to Becky Liu, a senior rates strategist at Standard Chartered. A positive for the US futures debut is that it will bring experienced American forex traders into the market for yuan. “CME [is] likely to gain better exposure to international investors who are used to the system,” Liu said.

CME offered non-deliverable yuan products almost six years ago, long before the yuan could be legally deposited abroad.

The deliverable products are paid out in yuan at the end of the contract and require enough of the currency to be in circulation to meet market demand. A non-deliverable product is settled in US dollars in reference to the official yuan exchange rate fixed daily by the People's Bank of China. It doesn't require the currency to circulate abroad.

In May last year, CME chief executive Phupinder Gill told Dow Jones that the group would launch deliverable products only when yuan deposits in Hong Kong had reached a level that would allow for healthy development in a futures market. CME's decision to put deliverable products on the market shows that liquidity in the offshore yuan market has reached a safe level.

The offshore liquidity of the renminbi is certainly on the rise. Yuan deposits in Hong Kong have doubled since early 2011 to almost RMB600 billion (US$96.2 billion), according to CME data. A recent currency swap agreement between the central banks of China and the UK demonstrated the potential demand for yuan in London, which overtook Singapore in September as the second-biggest center for renminbi trading after Hong Kong. A currency swap would allow the Bank of England to inject yuan into the market if demand rises and liquidity dries up.

The CME launch is answering only a small part of demand for yuan-based products. Reform in China's RQFII program is the main factor driving offshore interest in the yuan early this year, Cindy Qu, a senior analyst at Z-Ben Advisors in Shanghai.

The China Securities Regulatory Commission has continued to boost the RQFII quota, or the amount of renminbi that offshore investors can invest into China. The program started with a quota of RMB20 billion in 2011 but that was bumped up to RMB70 billion last month. Many expect that figure to hit RMB200 billion in the near future.

“We expect that there will be more and more offshore foreign investors in different countries,” Qu said, noting recent RQFII quotas allotted to Japan and Taiwan. “[The launch of the CME product] indicates that yuan-dominated products are very popular on a global scale. Many foreign investors want to hold the yuan.”