As China’s economy becomes increasingly integrated with the rest of the world, it is a natural trend for its currency, the renminbi (RMB), to be more widely used in trade and investment. However, RMB in China has traditionally been a closed market with strict capital controls where currencies could not be delivered offshore. That has changed in recent years. In 2010, China launched a pilot program for RMB trade settlement through banks in Hong Kong. The Chinese government has a publicly stated ambition of internationalizing the RMB and putting RMB on track to be one of the world’s reserve currencies. The introduction of off shore renminbi (CNH) is one of the major steps taken by the Chinese government in this direction.
Since the launch of CNH, we’ve seen phenomenal growth in this market. For example, by the end of 2010, CNH deposits in Hong Kong were around RMB 300 billion. By the end of 2012, that figure doubled.
In response to this rapid growth, CME Group announced today the launch of deliverable CNH Futures. CNH is literally the abbreviation for Chinese Yuan deliverable in Hong Kong. This is not an ISO code but it is commonly accepted code for Chinese Yuan transacted in Hong Kong.
The launch of the CNH, coming off the subprime crisis and the US Fed QE policies and the onset of EU sovereign debt crisis has made this currency very appealing to cash-rich global investors. China’s strong global trade especially through Hong Kong has also helped. The above infographic illustrates the timeline of key market developments leading to this growth.
Due to the popular belief that CNY is an undervalued currency, by most measures; the introduction of CNH in Hong Kong will allow people with that view to want to hold CNY for investment, hoping for appreciation as CNH is truly market driven and therefore has the ability to reflect demand and supply where CNY (the onshore currency) does not.
In the path to internationalization, today marks a big step for China’s currency.
CME Group senior managing director for financial products Derek Sammann discusses the launch of CNH futures: