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Sept. 18, 2012, 8:54 p.m. EDT

Yuan steps into futures on Hong Kong platform

Yuan futures trade marks another step toward loosening currency

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By Li Xiaoxiao

BEIJING ( Caixin Online ) — China’s internationalization of the yuan, also called the renminbi, is gaining pace now that the operator of the Hong Kong Stock Exchange has unveiled the world’s first deliverable offshore yuan futures.

Giving traders a way to bet on yuan futures, through contracts based on yuan-U.S. dollar exchange rates /zigman2/quotes/210561991/realtime/sampled USDCNY 0.0000% , is “part of our strategy to expand beyond equities and equity-related derivatives,” said Charles Li, chief executive of the market operator, Hong Kong Exchanges and Clearing Ltd. /zigman2/quotes/201215503/composite HKXCY -1.71%   /zigman2/quotes/200234512/delayed HK:388 -1.36%

“It also reflects our desire to support Hong Kong’s further development as an offshore renminbi center,” Li said in announcing the platform Aug. 22, by offering “a wide range of renminbi-traded products, taking advantage of opportunities we see in fixed income, currencies and commodities.”

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The initiative to create the offshore yuan market has Beijing’s full support. It fits a broader central government effort to promote global acceptance of the yuan for international trade settlements, China-bound foreign investments, government bonds and overseas banking.

Hong Kong was the first stepping stone for yuan internationalization. The government more recently opened doors for overseas use of the yuan in cities like London, where yuan-denominated bank deposits from individuals and companies reached 35 billion yuan ($5.54 billion) last year, second only to Hong Kong apart from the mainland.

CME Group Inc. /zigman2/quotes/210449693/composite CME -2.96% , the largest U.S. futures exchange operator, said it would launch deliverable offshore yuan futures, similar to those in Hong Kong but with longer maturities, in Chicago by the end of this year to complement its portfolio of yuan-traded products, which currently includes only cash-settled onshore yuan futures and non-deliverable forwards (NDFs).

Among these markets, Hong Kong is considered by China’s policy makers the most suitable laboratory for experimenting with currency reforms, said a financial analyst close to the central bank. Policies can be adjusted based on capital flow trends as well as fluctuating currency exchange and interest rates, he said, to keep the yuan internationalization campaign moving forward.

Analysts expect institutional investors to dominate the futures trading deck, at least at first, since they control most of the yuan parked in Hong Kong banks.

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Futures have become the fourth yuan-based financial product approved for trading in Hong Kong. Investors since 2007 have been buying yuan-based dim sum bonds sold by banks and multinationals with mainland subsidiaries, such as the fast-food chain McDonald’s /zigman2/quotes/203508018/composite MCD -2.76% .

Yuan-based real estate investment trusts started doing business last year, and yuan-denominated exchange-traded funds were allowed to open in January.

Futures trading can help form market-driven yuan exchange rates, because the contract price both reflects and affects traders’ expectations for the yuan’s exchange rate in the future, said He Liping, director of the international financial research department at Beijing Normal University.

Fertile ground

Hong Kong’s status as a well-regulated and properly serviced financial center, combined with its proximity to the mainland, gives it clear advantages as a springboard for global yuan applications, said Wang Hongying, deputy research director at futures broker China International Futures Co. Ltd.

The city also offers a stable environment for China-connected business deals since “Hong Kong’s yuan exchange rate does not sway significantly from the central bank’s reference rate,” Wang said, “even though it’s a free market.”

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