China eyes domestic yuan futures market to help boost currency internationalisation
- Foreign-exchange market for the yuan would help investors better hedge against future exchange rate fluctuations by locking into a set price
- Creating a domestic centre for trading the yuan would be in line with China’s dual-circulation economic strategy to protect the country from external risks
China intends to build a strong onshore foreign-exchange market for the yuan, as the launch of exchange rate futures contracts for domestic investors is rapidly climbing up the work agenda of Beijing’s policymakers.
In a working paper released on Tuesday, researchers at the People’s Bank of China (PBOC), the nation’s central bank, called for the creation of a yuan futures market in China to help investors better hedge against currency risks.
A futures contract would allow investors to buy or sell a certain amount of yuan at a set price at a specific time in the future. This would allow investors to lock into an exchange rate to secure future business transactions and guard against bouts of appreciation or depreciation of the Chinese currency. It would also allow investors to speculate on the future value of the currency.
The Hong Kong stock exchange, the Singapore Exchange and the Chicago Mercantile Exchange already offer futures contracts for offshore yuan trading. The Hong Kong exchange plans to launch “mini” futures in the first half of this year to meet the needs of small-market participants. However, domestic Chinese investors are not yet allowed to trade in foreign financial instruments, though the government said it is considering allowing them to do so.
The PBOC paper, written by researchers Lei Yao and Han Xintao, found extensive links between exchange rates in mainland “onshore” markets and those in “offshore” markets such as Hong Kong, London and Singapore.