Hong Kong Must Start Deliverable Forwards to Spur Use of Yuan, Calyon Says

Hong Kong should start a yuan deliverable forwards market to boost its ability to compete with Shanghai in renminbi trade and investment, said Frances Cheung, a senior strategist at Credit Agricole CIB.

Central banks in China and Hong Kong agreed on July 19 there will be no restrictions on companies buying or selling yuan in Hong Kong, subject to banks holding enough renminbi to provide liquidity. Since then, there have “reportedly been only a few isolated” forward trades, and there “are no quotes and prices on the market yet,” according to Cheung.

“Right now, companies are not willing to settle trade in the yuan, mainly because they cannot hedge their risks,” said Hong Kong-based Cheung. “The deliverable forwards market will make them less vulnerable to currency volatility.”

Hong Kong and Shanghai are battling for market share in developing yuan products as China seeks to globalize its currency. Shanghai should become the pricing center for yuan- denominated financial products, Zhang Jianhua, director of the research department at the People’s Bank of China, said yesterday.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Unlike non-deliverable forwards, deliverable contracts are settled in yuan.

Yuan deposits in Hong Kong rose 4.7 percent in May to 84.7 billion yuan ($12.5 billion), Hong Kong Monetary Authority figures show. The yuan has gained 0.7 percent in the past four weeks after the central bank said on June 19 it will allow greater flexibility in the exchange rate, ending a two-year dollar peg.

Capital Account

Under the agreement signed on July 19, cross-border flows of yuan will remain limited to trade settlements. The maximum amount individuals can convert from their Hong Kong dollar deposit accounts per day is 20,000 yuan.

Hong Kong and China should set up channels to allow yuan issued in the city to flow back to China, the Hong Kong Standard today cited K.C. Chan, Hong Kong’s secretary for financial services and the treasury, as saying.

While Shanghai has ready access to yuan funds, Hong Kong is dependent on trade flows to boost its currency pool. If China allows free movement of capital, companies might be encouraged to keep funds in Hong Kong without being worried about their ability to repatriate funds back into the onshore market, according to Cheung.

“China’s capital account is still closed after the agreement,” she said. “I think in a few years’ time, the central government may allow cross-border money flow, and then we’ll have a better-developed offshore market.”

Yuan settlement of trade between Hong Kong and China more than doubled to 7.2 billion yuan in May, compared with as much as 3 billion yuan in both March and April, the HKMA said last month.

To contact the reporters on this story: Andrea Wong in Hong Kong at at awong268@bloomberg.net;

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