China to Free Yuan in 5 Years, Says Hong Kong Exchanges’ LiMatthew Leising and Fion Li
China, the world’s second-largest economy, will open its markets and allow its currency to float within five years, said Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd.
“China has to reform its interest-rate system,” Li said yesterday during a panel discussion at the Futures Industry Association conference in Boca Raton, Florida. The value of the Chinese currency is limited by the government and is only allowed to rise or fall within a narrow range. Li said that system can’t last forever.
China last week allowed foreign financial companies to invest yuan raised offshore in its domestic markets, a step to reduce the nation’s reliance on the dollar by boosting demand for the currency. People’s Bank of China Governor Zhou Xiaochuan yesterday reiterated plans to gradually reform the exchange rate. HSBC Holdings Plc forecast this week the yuan will become fully convertible within five years.
After keeping the yuan stable for a decade, China allowed its currency to strengthen 21 percent from July 2005 to July 2008, including an initial, single-day gain of 2 percent. Appreciation was then halted for almost two years to help exporters weather a global recession and the currency has advanced 10 percent against the dollar since controls were loosened on June 19, 2010.
The People’s Bank of China sets a daily reference rate for the yuan based on market makers’ quotations and the spot contract in Shanghai can trade as much as 1 percent on either side. It last increased the band on April 16, 2012, the first expansion since 2007. Of 20 analysts surveyed by Bloomberg News in November, 12 predicted a further widening by the end of this year and eight forecast a revision in 2014.
“I would expect China to increasingly move towards a managed float with more flexibility,” Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group in Singapore, said by telephone today. “Basically convertible is possible in five years, but it might not be 100 percent convertible.”
Basic convertibility doesn’t mean China would give up total control, Huang Yiping, Barclays Plc’s Hong Kong-based chief economist for emerging Asia, said in September 2011. His understanding of the situation was based on participation in discussions about the yuan with policy makers including those from the Chinese central bank, he said.
The yuan declined 0.04 percent to 6.2162 per dollar as of 11:56 a.m. in Shanghai, after the central bank weakened the currency’s fixing for the first time in three days. Twelve-month non-deliverable forwards dropped 0.1 percent to 6.3070, ending their longest winning streak since September 2010.
Since China started a pilot program allowing the use of yuan to settle cross-border transactions in 2009, the proportion of its trade conducted in the currency has increased to 9 percent from less than 1 percent, according to the People’s Bank of China. By 2015, a third of China’s cross-border trade will be settled in yuan, making the currency one of the three most-used in global trade along with the dollar and euro, HSBC forecast in a report this month.
The Chinese currency will appreciate 2.1 percent to 6.1 per dollar this year, compared with a 1 percent gain in 2012, the median forecast in a Bloomberg News survey of analysts showed. The yuan has overtaken the Russian ruble for transactions in the global payment system for the first time in January, according to Society for Worldwide Interbank Financial Telecommunications, a financial-messaging platform.
London is racing against Paris and Zurich to become the center for yuan trading in Europe as China seeks to take its currency global. The Bank of England said it has the inside edge to be the first Group of Seven nation to sign a currency-swap agreement with the People’s Bank of China after a meeting last month. The deal may allow the U.K. central bank to supply as much as 400 billion yuan ($64 billion) to banks, matching Hong Kong’s swap arrangement, according to Gao Qi, a markets strategist at Royal Bank of Scotland Group Plc in Singapore.
Trading in exchange-listed derivatives worldwide fell 15.3 percent last year, compared with 2011, with interest rates, currencies and equity contracts all declining, the Futures Industry Association said earlier this week.
The central bank policy in the U.S. of holding benchmark interest rates near zero for more than four years has reduced demand from investors to hedge against an increase, hurting the volume of futures tied to the borrowing measure. Trading in CME Group Inc.’s Eurodollar future dropped 24.4 percent in 2012 compared with the year earlier, while NYSE Euronext’s Euribor contract fell 26.1 percent, FIA said.
The largest drop geographically occurred in Asia-Pacific, with a 23.4 percent decline, according to FIA. Trading in North America fell 11.9 percent while in Europe futures and options on futures declined 12.5 percent.
CME Group, based in Chicago, was the largest futures market by volume, with 2.89 billion contracts changing hands last year, FIA said. Eurex AG was second, with a volume of 2.29 billion.
Contracts based on agricultural products and energy saw gains in 2012. Corn, soybean, wheat and other food-related products rose 27.5 percent last year, while futures on crude oil, natural gas and gasoline jumped 11.2 percent, FIA said.
Interest-rate contracts fell 16 percent, equity indexes dropped 28.5 percent and currencies fell 22.7 percent, FIA said.
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