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HKEx: Prepared for Greater RMB Volatility

Updated: 09 Mar 2014
Charles Li Direct Page

The Renminbi (RMB) has been making headlines in recent days because of its decline relative to the US dollar.  In fact, the RMB has fallen the most since new foreign exchange rate policies were introduced in 2005, plummeting 1.4 per cent in only three weeks.

For a currency long assumed to be on a one-way path towards further appreciation, this news has naturally sparked a lot of discussion among analysts, investors and the media.  Some believe the depreciation may be the result of the People’s Bank of China wanting to shake out speculators; others say it may be in preparation of a wider trading band; while some believe China may be choosing to devalue the currency for domestic reasons.  In my view, the reasons behind the change are secondary.  No matter what happens, the RMB is on a path to greater internationalisation and increasing volatility – and greater risk is a part of that.

And why shouldn’t it be?  The world has changed, and the RMB is no longer only a domestic currency.  Use of the RMB worldwide has grown exponentially, with RMB deposits in Hong Kong skyrocketing from around RMB60 billion in 2010 to RMB893 billion in January this year.  Trade settlement by banks in Hong Kong has grown from an inconsequential amount in 2009 to RMB3.8 trillion in 2013, a staggering increase in a very short period of time.

The Bank for International Settlements recently ranked the RMB the ninth most traded currency in the world, one more reason cities like London, Singapore and Taipei are looking to transform themselves into key hubs for offshore RMB complete with a suite of RMB products.  We in Hong Kong are well positioned, having the foresight to lay the groundwork to facilitate and benefit from the RMB’s internationalisation’s earliest developments.  Through hard work and strategic investments, infrastructure was put in place in 2011 to facilitate RMB-denominated IPOs, followed by the world’s first physically deliverable RMB Currency Futures in 2012.  We now have 112 RMB-denominated products listed on HKEx’s markets.

Some of our early efforts are starting to bear fruit today.  Our RMB Currency Futures contract, for instance, has seen steady growth since it was introduced in 2012.  Average daily volumes in February saw a record high of 1,461 contracts (US$146.1 million notional), up 500 per cent from the average daily volume in 2012.  We also saw record daily volume of 5,970 contracts traded (US$597 million notional) on 25 February.  Meanwhile, open interest has grown more than 600 per cent, hitting a month-end high at 22,636 contracts (US$2.3 billion notional) in January.  The open interest’s record day high of 23,887 contracts (US$2.4 billion notional) was hit on 14 February. We are seeing increasing need for price transparency and to manage foreign exchange and interest rate risk in light of the RMB’s volatility, especially among corporates engaged in business between China and other countries.  Futures contracts provide easy access to all investors to address these risk management needs effectively and efficiently.

As Chinese leaders made clear their desire to have the market play a decisive role in China’s future in November last year, we expect the RMB’s internationalisation to only pick up steam in the months and years ahead.  That means RMB volatility is here to stay.  We want to ensure we don’t surrender our first mover advantage.  We need to stay on our toes and make sure we’re providing the right risk management tools.

With that in mind, we’ve been working on a number of new initiatives.  Just last week, we announced RMB Currency Futures received approval from the Securities and Futures Commission (SFC) to be included in our After Hours Futures Trading (AHFT) session, starting on 7 April.  With RMB Currency Futures contracts available after the end of market close, it will help meet demand from the European and US markets as well.

Secondly, we are looking at extending the maturity of RMB Currency Futures to manage longer-term risk exposures.  In the future, we aim to lengthen the maturity even beyond 16 months, introduce RMB Currency Options and further extend AHFT hours.  Last week we also announced our first infrastructure footprint in Mainland China, our Mainland Market Data Hub.  For now, it is making index and securities market data available to our Mainland clients, but later this year derivatives data will be added as well.

Finally, our RMB readiness has extended into the over-the-counter derivatives space.  We launched OTC Clear last year and we expect it to grow over time.  It is already clearing single currency interest rate swaps (IRS), single currency basis swaps, non-deliverable IRS and non-deliverable forwards, supporting RMB-related FX and interest rate risk management.

The recent volatility in the currency demands products that can manage exchange rate risk, and our RMB Currency Futures are a key tool for that.  But internationalisation of the currency also requires a much wider spectrum of RMB-denominated products outside of Mainland China. We’ve made a start, but more will be done.  We’ll stay focused and ensure HKEx Group remains well positioned to serve the needs of investors in this next phase of China’s remarkable growth story.


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