Offshore yuan market is mainly for speculation
Buyers will hold the currency as long as it appreciates against the US dollar because there is not much else you can do with it outside China
London pushes ahead with yuan ambitions
SCMP headline, December 3
And Beijing pushes ahead with yuan triumphalist campaign. It seems every second day that we read of yet another country eager to open an offshore yuan trading centre. Move aside, US dollar. The yuan is on the march.
But why exactly should people around the world be so impatient to get their hands on yuan?
You cannot use yuan for consumer or investment purposes outside China. This currency has uses only in its home market.
There might be a natural offshore market of sorts if China ran a big trade deficit.
Foreigners paid in yuan for their exports to China would then look for middlemen to reroute this money back where it came.
But things are the other way round. Despite much talk of a trade slowdown the current account was still in a surplus of US$200 billion a year earlier this year and has been in consistent surplus for many years.
Preliminary figures indicate that this surplus has risen in the second half.
China is indeed awash with money to place in offshore currency markets but denominated in US dollars, not yuan. It is undoubtedly true that importers in China have been able to pay for their foreign purchases with yuan recently.
The reason, however, is not a growing and already liquid offshore yuan market but speculative interest in the yuan. The people taking this yuan are mostly holding it on a bet that Beijing will continue to orchestrate yuan strength against the US dollar.
In the meantime they benefit from yuan interest rates that are generally better than they can get in US dollars.
This speculative sentiment has see-sawed a little this year in exact measure to the movement of the yuan.
It was strong at the start of the year and then weakened in summer amid talk that the yuan might begin to weaken.
Beijing then gave its currency a push again and the talk swung back to yuan strength.
I have been a participant in this. I am treasurer of the Foreign Correspondents Club and last year the FCC investment committee recommended as big a weighting in yuan for our surplus funds as our investment guidelines allowed.
Yes, we're speculators - nasty, greasy, shifty-eyed creatures whom journalists actually love to decry.
We are so because we make no claims of loyalty to the yuan. If we think it will now weaken again we will go out immediately, as will all the other speculators on whom this illusion of an offshore yuan market depends.
The talk of London's yuan ambitions will then go quiet again and the truth will become apparent - Beijing's dreams of an offshore yuan market can be sustained only by continued upwards manipulation of the yuan against the US dollar.
It is just smoke and mirrors.
There is a way of getting a real offshore yuan market in London, however.
It can be done by opening a real offshore pound sterling market in China and making it open to everyone.
But this would constitute opening the capital account, which would mean Beijing losing control over investment of the domestic savings base.
It won't happen for a long, long time, which means that a London offshore yuan market will be a fantasy for just as long.