HKEx begins trading of offshore yuan futures

The newly introduced offshore yuan currency futures, the world's first deliverable futures denominated in the yuan, will start trading Monday after the Hong Kong Exchanges and Clearing Limited (HKEx) announced Friday the market makers for the trading.

The market makers include Singapore-based DBS Bank Limited, Hong Kong-based ICBC International Futures Limited, US-based Merrill Lynch International and HSBC Holdings Plc, according to the announcement.

The move aims to offer the offshore yuan holders hedging and arbitraging tools, which had been absent from China's drive to promote the global use of the yuan, and also to help Hong Kong shore up its position as an offshore yuan center, experts told the Global Times.

Rather than directly introducing the yuan currency futures, the country, since the 1990s, had just introduced to the offshore investors the yuan's non-deliverable forward (NDF), in which counterparties only need to settle the difference between the contracted NDF price and the prevailing spot price on an agreed notional amount, with cash settled in the dollar, because the global investors and the foreign enterprises with trade cooperation with China did not hold the yuan due to Beijing's restrictions on the capital account (i.e. yuan's outflow), Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times Sunday.

"The yuan's NDF can hardly meet the offshore market's soaring demand for hedging the currency's risks," Zhou said.

As Beijing has loosened the grip on the country's capital account since the 2000s, with an expansion of QDII and QFII quotas for the cross-border flow of yuan-denominated capital investment and enlargement of non-equity offshore yuan products, like dim sum bonds and ETF products in Hong Kong, the offshore players, including investors and traders, have more incentives to hold the yuan for either investment or settlement, which has inevitably boosted the demand for hedging the yuan's currency risks, Yin Jianfeng, deputy director of the Institute of Finance and Banking with the Chinese Academy of Social Sciences, told the Global Times.

Moreover, expectations that the yuan's appreciation will weaken is another factor driving up the hedging needs for the yuan currency investment, Zhou added.

However, the yuan's NDF, which stays at Hong Kong's over-the-counter market, can hardly serve the yuan holders who wish to hedge against the yuan's currency risks, given that unlike the exchange-operated yuan currency futures, the yuan's NDF is both inadequately linked with the yuan's spot market and is deficient in information disclosure, standardized products and sufficient liquidity, Yin said.