By DINNY MCMAHON
BEIJING—The Chinese yuan is going electronic, a sign of the growing interest generated by China's experiment in liberalizing offshore use of its currency.
ICAP PLC and Thomson Reuters Corp., which began allowing the yuan to trade on their electronic-trading platforms last week, said they are in discussions with banks in the U.S. and Europe about using the new systems. Neither company would identify the banks, but ICAP has handled several yuan trades a day that average roughly $2 million.
It is a small start, and the trading is limited to the relatively small pool of yuan circulating in Hong Kong. Still, the advent of electronic trading of the yuan and its likely expansion to traders beyond Hong Kong mark an important toward building the infrastructure to support a global market for the currency.
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China's government has made a series of moves in the past year to encourage the yuan's use outside China, an effort to become less dependent on the dollar for trade and investment. The moves are allowing pools of yuan to accumulate in bank accounts outside of China, particularly Hong Kong.
Hong Kong banks have been trading the currency among themselves, but through over-the-counter trades where the banks contact each other directly or through brokers. The entry of companies such as ICAP and Thomson Reuters means that prices and trading amounts will be posted openly.
"Connecting [the yuan] with the electronic-trading community increases the pool of market participants," said Jens Scharff-Hanse n, co-head of foreign-exchange trading in Asia for Deutsche Bank AG. The German bank is setting up trading in offshore yuan on the ICAP and Thomson Reuters platforms.
In the long run, electronic trading and other recent moves to expand the yuan's use could lead to a larger role for the Chinese currency in the fast-growing global-currency market, which recently surpassed $4 trillion in daily trading volume. Global trading is now dominated by the dollar and the euro.
The offshore yuan market could cause headaches for China's government. Beijing has worked hard to keep the yuan's value from rising too quickly, a practice that has fueled anger in the U.S. and Europe.
In the offshore market, the yuan has traded as much as 1.6% stronger against the dollar than it did onshore, according to data from Deutsche Bank. As offshore pricing becomes more transparent, it is likely to draw more attention to the relatively weak yuan rate in China.
Still, onshore trading is certain to dwarf the volume in Hong Kong for the foreseeable future, and the official exchange rate will remain the most important. In addition, the spread between the two markets isn't likely to widen too far, because Chinese exporters with a presence in Hong Kong will be able to arbitrage between the two markets.
China's government long kept strict limits on the availability of its currency overseas, confining trading of the yuan, also called the renminbi, to a state-run exchange in Shanghai. Companies and other investors outside China wanting to take a position on the yuan usually could trade only derivatives tied to the currency's expected future value. That market is settled in foreign currency, not yuan.
China's interest in promoting the yuan for international use expanded in the wake of the global financial crisis, as worries grew about the country's reliance on the dollar. Last year, Beijing began allowing some foreign trade by Chinese companies to be settled in yuan. In July, Beijing agreed to remove many limits on use of yuan in Hong Kong, setting off a flurry of new offshore yuan activity.
For now, the amount of yuan available for offshore trade is small, but it is growing rapidly. At the end of August, yuan deposits in Hong Kong banks totaled 130.4 billion yuan (US$19.5 billion), up 26% from July and more than double the double the year-earlier level.
Electronic platforms play a sizable role in global currency trade. ICAP's platform handled an average of $147 billion in spot foreign-exchange trades a day in September.
Jeff Ward, head of ICAP Electronic Broking in Asia, said the company is in talks about its electronic-trading platform for yuan with banks in the U.S. and Europe. A spokesman for Thomson Reuters, which also started yuan trading on Sept. 27, said foreign banks had also expressed interest in its yuan service.
There are limits on the trades. Banks need a clearing and settlement arrangement with a financial institution supervised by the Hong Kong Monetary Authority. All of the offshore yuan has come to Hong Kong through corporate trade or retail depositors.
Thomson Reuters allows yuan in Hong Kong to be traded against the dollar, euro and yen. ICAP has started only U.S. dollar-yuan trading, but plans to introduce euro, yen and Hong Kong dollar pairs in the coming weeks.
The offshore yuan is quoted under the symbol CNH, for Chinese yuan in Hong Kong, rather than the standard CNY symbol for Chinese yuan, because it is legally distinct from China's tightly controlled onshore currency market.
Write to Dinny McMahon at firstname.lastname@example.org