• Thu
  • Dec 18, 2014
  • Updated: 4:52pm
PUBLISHED : Friday, 06 September, 2013, 12:00am
UPDATED : Friday, 06 September, 2013, 3:38am

Yuan rise a zero-sum game which Hong Kong is losing

It's not the win-win opportunity we've been expecting as the Chinese currency is gaining in global markets at the expense of the HK dollar

After all the hype about the yuan's unstoppable advance, we finally have a reliable snapshot of how widely the Chinese currency is being traded in international markets.

Yesterday, the Basel-based Bank for International Settlements, a sort of financial service provider for the world's central banks, published the preliminary results of its triennial survey of the global foreign-exchange market.

As you'd expect, dealing in the Chinese currency has exploded over the past three years, rising to US$118 billion a day in April this year from just US$35 billion in April 2010.

That's a big increase. But before you get too excited, let's put that figure in perspective.

On an average daily turnover of US$118 billion, the yuan ranked ninth in the league table of the world's most traded currencies, with a market share of just 2.2 per cent - behind the Mexican peso (see the first chart).

Contrast that with the US dollar. Despite innumerable stories about the terminal decline of the American currency, the greenback has only consolidated its position as the world's pre-eminent currency since the financial crisis, capturing 87 per cent of the global market (because foreign-exchange transactions are two-sided, the total market share equals 200 per cent).

Both the yuan and China’s financial centres remain relative minnows in the market

Similarly, despite all the talk of Shanghai as a rising international financial centre, China's onshore foreign-exchange market remains tiny by global standards.

With an average daily trading volume of US$44 billion, the mainland captures less than 1 per cent of the world market. Meanwhile, Hong Kong's daily turnover reached US$275 billion, while London hit a monstrous US$2.7 trillion (see the second chart).

Yet although both the yuan and the mainland's financial centres remain relative minnows in the foreign-exchange market, their gains do have important implications for Hong Kong.

For the past few years, eager bank executives have told us that yuan internationalisation and the development of Shanghai's financial markets are a win-win opportunity for Hong Kong.

Not only will Hong Kong win a healthy share of the new yuan market, it will also gain new counterparties in the mainland's emerging financial centres.

That was the promise. But the Bank for International Settlements survey paints a different, and rather more worrying picture.

The rise of the yuan over the past three years has been paralleled by the relative decline of the Hong Kong dollar.

As the yuan's share of the global foreign-exchange market has climbed from 0.9 per cent to 2.2 per cent, the Hong Kong dollar's has shrunk from 2.4 per cent to 1.4 per cent.

Considering that over the same period both the Taiwan dollar and the Singapore dollar kept their market share unchanged, this suggests the yuan is gaining in international markets at the expense of Hong Kong's currency.

That's plausible. In the past, a sizeable portion of the mainland's trade was settled in Hong Kong dollars, while Hong Kong dollar derivatives were traded as a proxy hedge for the yuan. Now companies and investors can deal directly in the Chinese currency, the Hong Kong dollar has lost out.

It's not just Hong Kong's currency that's losing market share. In 2010, Hong Kong as a centre commanded 4.7 per cent of the global foreign-exchange market. That share has now dropped to 4.1 per cent.

Part of that decline is because volume has leaked away to Singapore, where costs are lower. But it is likely that business has also been lost to the mainland, where market share is expanding.

As a result, it seems that for Hong Kong's foreign-exchange market the rise of the yuan is not a win-win proposition.

It looks more like a zero-sum game; a game in which Hong Kong will lose as the mainland gains.



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This article is now closed to comments

is Tom so sure that the leakage of forex trading volumes to Singapore is due to costs? Let's get this straight. Singapore has always been ahead of HK in forex trading volumes for as long as I can remember, and has now extended its lead over HK, even though the city was the exclusive centre of offshore yuan trading for the period of 2010-2013, and has now leapfrogged Tokyo, despite the spike in dollar yen trading in the last year or so.
The excuses sound rather cheap I have to say.
Oh Mr Holland, your naiveté is touching. Don't you see it? The decline of the Hong Kong dollar while the yuan rises is a feature, not a bug. What you are observing is the -CCP- plan. It is one of the many bullet points on the list of goals to be achieved, not some unwelcome side-effect.

How long do you really think it will take before the HKD ceases to exist? I don't think it will take more than five years before it becomes pegged to the RMB instead of the USD through some kind of special swap arrangement. Perhaps a grand bargain with the people of Hong Kong will be struck involving the use (ie, spending: housing, education, etc) of those billions of exchange reserves we have stocked away and for which we will then no longer have much use. Or perhaps the PBC will just say 'Thank you, we will take those too.'

Either way, the HKD will then have become a proxy-currency for the RMB. It may continue to exist as an accounting entity and in tender (notes and coins), but that is merely symbolic.

And while I am certainly no friend of the mainland nor a proponent of 'mainlandisation,' I have to admit that, purely economically and perhaps politically, that makes a lot more sense than being a USD proxy currency.
The peg of the HKD to the USD cannot be clearly explained. Those who supports it cannot give a good convincing reason why the peg still exist today. The HKD is one of the most unstable and weaker currency in the world just like the Vietnamese Dong, Indian Rupee. Most people will avoid keeping it unless there is no choice or just for a short period.


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