Chinese Yuan
December 13th, 2006 by Justin
Talk about China’s currency never stops. So much so that most Americans have probably heard enough to develop an opinion on where the Chinese Yuan or Renminbi (RMB) is likely to go next. Trouble is, when they attempt to actually trade based on their view, they quickly realize that speculating is either impossible or only available to a select group of market participants.
Those accustomed to open, free trading of currencies (having lived in Europe and the US, perhaps), may fail to realize that the reason trading the Yuan is so difficult is that the Chinese government’s policies prevent it. China restricts full convertibility of the RMB, so that only certain parties may exchange it for other currencies. As such, active spot and futures markets are replaced by other types of instruments that are tougher for normal folks to get at.
So-called non-deliverable forward contracts (NDFs) are one option, currently traded between banks and large clients, as well as on the Singapore exchange. In the US, an alternative is to trade a futures contract on the CME which is based on the RMB. HSBC and Standard Chartered–two banks with a large Asian presence, were announced as the first market makers on the relatively new contract a few months ago. However, according to a new article from the New York Times, another choice may soon be available:
A senior Hong Kong official gave cautious support today for the creation of a currency futures market here by the end of next year that would include China’s currency.
Political considerations have stalled the emergence of a currency futures market here until now, although banks in Hong Kong already do extensive over-the-counter currency deals with one another.
China pegged its currency at 8.27 to the American dollar until July 21, 2005, when it switched to using a basket of foreign currencies to peg its value. Though the yuan does not float freely, its value can now vary somewhat against individual currencies in the basket; in recent months, the Chinese currency has gained against the dollar.
“I would imagine that we would be introducing the RMB or other foreign currency contracts hopefully within the year 2007,” Mr. Ma said, using a common abbreviation for the renminbi.
The value of the nondeliverable forward contracts now traded in Singapore is calculated from the future value of the renminbi to the dollar, but the contracts cannot be settled in renminbi, as an ordinary currency contract would be, because Chinese capital controls make it difficult to obtain large sums of renminbi outside China. Instead, the contracts are settled in Singapore dollars.
