Offshore yuan market gets into its stride
Donna Kwok says the strategy of making China's currency truly international is on schedule
The offshore renminbi market in Hong Kong has just turned two years old and the currency has made extraordinary strides.
Since it took its first toddler steps in July 2010, the daily turnover in the offshore renminbi foreign exchange market has risen from essentially nothing to US$4billion, and one-tenth of China's trade is now settled in its home currency, up from 2per cent two years ago. As offshore renminbi liquidity continues to grow, it is expected to account for around 30per cent of Hong Kong's total deposits by 2015, compared with today's 9per cent.
The huge success of the offshore renminbi brings its own challenges. For example, what's the best way to measure the amount of the currency in circulation?
Hong Kong's outstanding renminbi deposit base has often been used as the best indicator of overall offshore renminbi liquidity and, therefore, the development of the offshore market in general. It's an important yardstick because without sufficient liquidity, transactions in the offshore renminbi market would dwindle.
Simply put, the bigger the pool of offshore renminbi, the more viable the market becomes for institutional investors. But while the renminbi deposit base worked before as a useful guide for tracking offshore renminbi activity - when the product platform was still in its infancy - a wider definition of renminbi liquidity is now needed. The market is getting deeper and broader, so liquid fund flows that leave Hong Kong's offshore renminbi deposit base, but not the market, should also be included.
If funds invested in higher-yielding renminbi certificates of deposits are taken into account (almost 140billion yuan - about HK$170billion - at the end of June) along with pools of offshore renminbi deposits in London (35billion yuan) and Singapore (60billion yuan), total offshore liquidity is at an all-time high of almost 790billion yuan.
In fact, offshore renminbi activity has flourished during the past year without a comparable expansion in Hong Kong's deposit base, which has actually fallen 11per cent since November. This surprised some observers as in its first year of existence, Hong Kong's offshore renminbi deposit base had leapt from around 90billion yuan to over 550billion yuan. (The current total is around 558billion yuan.)