With quotes like these: "This is the beginning of a new era,"; "This is a step moving to full convertibility of the yuan, and is a major change of the international financial landscape"; "What makes it exciting is that this is a move by China in a direction that many have been waiting for,"; how could your palms not get sweaty?! Basically what is going on is that the Chinese government has allowed for the currency to be 'shipped' out of its boarders and traded on an open market, kinda. This story is from the WSJ.
China's currency, pent up inside the country's borders for decades, is emerging as a hot property in global foreign-exchange markets, just months after Beijing allowed the yuan to be bought and sold outside the mainland for the first time.
Daily trading in the yuan has grown from zero to $400 million in the past few months, as the currency of the world's second-biggest economy begins to flow around the globe.
The value of the yuan remains tightly controlled by China, so its value won't rise and fall to the same extent as the dollar or euro, in spite of the new trading. Even so, foreign-exchange traders who are embracing the currency see demand for yuan rising sharply. Bankers in New York, London and Tokyo are rushing to set up new trading systems and back offices to trade in yuan.
"This is the beginning of a new era," said Norman Chan, head of Hong Kong's central bank. "This is a step moving to full convertibility of the yuan, and is a major change of the international financial landscape."
The yuan, which closed official trading Monday at 6.6670 per dollar, down slightly on the day, has risen 2.4% against the greenback since mid-June, when China loosened the currency's peg against the dollar and allowed the yuan greater flexibility to rise or fall in value.
The continued growth in yuan trading isn't a foregone conclusion. China could reverse itself and slow the growth of the market. China's leaders fear that if too much currency builds up too quickly overseas, they could lose control of inflation and interest rates. Nevertheless, the establishment of offshore trading in yuan is "game changing," said David Mann, head of research in the Americas for Standard Chartered Bank. "
Already, banks such as Citigroup Inc. and HSBC are offering investors yuan-priced options and interest-rate derivatives. Mutual funds dedicated to yuan-priced investments have already been created.
The move has opened the doors to wider issuance of yuan-denominated bonds and other investments. McDonald's Corp. and Caterpillar Inc. recently became the first U.S. non-financial corporations to sell debt priced in yuan, in what is being nicknamed the "Dim Sum" bond market. HA NICE NAME!
The moves come against a broader background of growing Chinese concern over the country's reliance on the dollar.Long term, the offshore yuan market could decrease demand for the dollar and lower its value. That's in part because Chinese companies doing business with counterparts in other countries wouldn't need U.S. dollars to conduct that business as they do today.
The keen level of interest in the offshore yuan trading was evident last week in midtown Manhattan at the headquarters of HSBC. Some 80 traders from 20 banks came to hear a presentation organized by ICAP PLC on offshore yuan trading featuring Esmond Lee, an official from the Hong Kong Monetary Authority. Previous sessions in Hong Kong and London had been similarly packed.
"What makes it exciting is that this is a move by China in a direction that many have been waiting for," said Edward Brown, an executive vice president at ICAP, the world's largest broker of currency trades among banks.
