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World's First Offshore Yuan Futures Market Makes Quiet Debut

The world's first offshore yuan currency futures market debuted in Hong Kong on Monday in move backed by Beijing to underline its ambition to slowly internationalize the currency, but interest was muted among investors. Yuan futures ended lower against the dollar on a quiet first day of trade in what is the latest product launched by Hong Kong Stock Exchange to further develop the fledgling market in yuan trade and to attract investors.

HONG KONG -- The world's first offshore yuan currency futures market debuted in Hong Kong on Monday in move backed by Beijing to underline its ambition to slowly internationalize the currency, but interest was muted among investors.

Yuan futures ended lower against the dollar on a quiet first day of trade in what is the latest product launched by Hong Kong Stock Exchange to further develop the fledgling market in yuan trade and to attract investors.

China has been promoting the international use of the yuan in trade and investments for the past two years to reduce the country's reliance on U.S. dollar.

A thriving market in yuan-denominated bonds and deposits has sprung up in Hong Kong as a result, and banks and exchanges from Singapore to London are eager for a piece of the action.

China is planning to make the yuan basically convertible as early as 2015 and, further down the road, turn it into a global currency on par with the dollar.

The CNH futures market recorded just 415 contracts on Monday, amounting to a total contract value of $41.5 million, much lower than the average daily trading volume of around $2 billion in the deliverable forward market estimated by traders.

"Low volume is the only thing to talk about today (in the CNH futures market), but it's well within expectations," said a trader in Hong Kong, adding there are many alternative channels such as the interbank market to trade forex.

The most active CNH futures transactions were December 2012 and June 2013 contracts, which saw 82 and 80 contracts, respectively, while the January 2013 contract posted only 10 contracts.

Traders said the weakness in yuan futures not only reflected expectations of a depreciating yuan, but also interest rate differentials as a result of tight liquidity in the offshore yuan market.

"While the CNH futures market and the CNH forward market could impact each other, it could most likely be the case for CNH futures to follow the forwards," said Frances Cheung, senior strategist at Credit Agricole CIB.

The September 2013 USD/CNH futures contract closed 1420 pips higher at 6.4574, implying the yuan will depreciate 2 percent in a year's time, while the one-year deliverable forward was quoted at 6.4560.

The spot yuan traded in a narrow range on Monday, briefly touching a fresh four-month high of 6.3122 to the dollar in the morning before retreating to close at 6.3173, down 28 pips from Friday's close.

The Hong Kong stock exchange said last month it would launch the first USD/CNH futures, aiming to capitalise on the product's transparent pricing and lower counterparty risks to attract investors to the nascent offshore yuan market.

The CNH currency futures contracts require delivery of dollars by the seller and payment in yuan by the buyer at maturity.

The largest U.S. exchange operator, CME Group also announced a plan last week to launch CNH futures in the fourth quarter of this year.

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