Offshore yuan market to keep growing fast: HSBC

By Kim Young-gyo
HONG KONG, May 25 (Yonhap) -- The offshore market for the Chinese currency will likely continue to grow rapidly as the volume of overseas yuan deposits is expanding, a British bank said Wednesday.
"The offshore yuan market formation has been one of the most interesting and exciting developments in the foreign exchange (FX) markets last year," said Daniel Hui, senior foreign exchange strategist at HSBC Ltd.
"The offshore market will likely eclipse the non-deliverable forward (NDF) market in liquidity in the coming few years, as the overall deposit base of the yuan increases."
An NDF is an outright forward or futures contract on a certain amount of foreign exchanges in which two parties settle the difference between the contracted rate and the prevailing spot rate. NDFs are prevalent in countries where forward FX trading has been banned by the government, usually in an aim to prevent exchange rate volatility.
HSBC said the overseas yuan deposit base came to over 450 billion yuan (US$69 billion) at the end of March, up a whopping 251 percent from a year earlier. The bank forecast the total deposit will reach 800 billion-1.2 trillion yuan by the end of 2011.
"The deposit base is the key indicator to watch when tracking overall yuan market development -- as it forms the basis of market supply and liquidity, as well as the source for fundraising," Hui said.
Liquidity of the yuan has grown at a 27 percent monthly pace with spot dollar-yuan seeing around $1 billion daily turnover, having more than tripled since the end of November.
Total liquidity has already reached roughly half the daily NDF turnover of $3-4 billion, the bank said, expecting yuan liquidity to surpass NDF liquidity by the end of 2012, the bank estimated.
HSBC, however, predicted that convergence between onshore and offshore foreign exchange rates is not likely to occur for some time, as China's capital account continues to separate the two.
"Full convergence will occur only when the capital control regime is no longer primarily oriented toward preventing speculative appreciation pressure," the strategist said.
"This will only likely occur when the yuan is perceived to be near fair value, when one-way appreciation expectations fade and external imbalances become negligible."
China saw its trade surplus jump in April to $11.43 billion as exports soared to a record high. The trade surplus stood at $140 million in the previous month.