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

PUBLISHED : Friday, 06 September, 2013, 12:00am
UPDATED : Monday, 27 June, 2016, 11:50am

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.