Offshore Yuan Strengthens as China Lifts Barriers, Extends Hours

Updated on
  • Demand will climb as nation makes trading easier: researcher
  • Shanghai market to stay open till 11:30 p.m. from January

The offshore yuan strengthened as the Chinese central bank’s decision to extend onshore market hours and allow in more foreign participants spurred optimism that demand for the currency will increase.

Trading in Shanghai will end at 11:30 p.m. local time from Jan. 4, compared with the current 4:30 p.m., the monetary authority said in a statement on Wednesday, adding that permitting foreign institutions with significant volumes to trade in the onshore foreign-exchange market will help narrow the gap between the currency’s rates at home and abroad.

“Foreign investors’ use and demand for the yuan will definitely increase next year, as China makes trading easier and carries out more reforms to make the foreign-exchange market more liberalized," said Liu Jian, a Shanghai-based researcher at Bank of Communications Co. specializing in cross-border capital flows. “In the long term, such reforms will benefit the yuan’s exchange rate.”

The offshore yuan rose 0.11 percent to 6.5395 a dollar as of 4:40 p.m. in Hong Kong, according to data compiled by Bloomberg. The Shanghai rate closed little changed at 6.4768, according to China Foreign Exchange Trade System prices. The People’s Bank of China cut its daily reference rate, which restricts onshore moves to a maximum 2 percent on either side, by 0.04 percent to 6.4755.

Manipulation Precaution

The yuan’s spot rate at 4:30 p.m will continue to be considered the day’s last price even after the extension of trading hours, the PBOC said on Wednesday, adding that thin liquidity during European hours could result in unfair pricing and even manipulation. This is significant because it means that the following day’s central bank reference rate will be determined by the Asia trading session, according to Mizuho Bank Ltd.

In August, the PBOC overhauled its mechanism for setting the fixing and said it would give investors greater sway. The monetary authority ordered market makers who submit contributing prices to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates.

The extension of trading hours means that the Chinese onshore market will be open during the daily noon valuation in London of the International Monetary Fund’s Special Drawing Rights. The basket, which is made up of the greenback, euro, yen and British pound, will include the yuan from October 2016.

— With assistance by Tian Chen

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