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Offshore Yuan Trade Most Exciting Since Euro: Broker

The lukewarm response to China's first offshore yuan IPO in Hong Kong last month may have raised questions about Beijing's bid to turn the Chinese yuan into a global currency, but analysts remain optimistic.

Yuan
Frederic J. Brown | AFP | Getty Images
Yuan

Jeff Ward of electronic broker ICAP has described the internationalization of the yuan as "one of the most exciting things in the foreign exchange market that's happened since the introduction of euro."

"The establishment of the offshore market could also be analogous to the eurodollar market in the late 60s and early 70s," Ward said. The eurodollar market he refers to are time deposits denominated in U.S. dollars at banks outside the United States

The yuan-denominated Huixian REIT IPO fell 10 percent when it debuted on the Hong Kong Stock Exchange last month, but by all other counts, the demand of all things yuan-related continues to be strong.

Yuan deposits in Hong Kong, the main testbed for offshore yuan products, reached $451.4 billion in the first quarter, the Hong Kong Monetary Authority said. That's an 8-fold increase from the previous year.

According to report by Deutsche Bank, the territory’s yuan deposits are growing at at a pace of CNY 60 billion a month, ahead of the bank's own projections of CNY 20 billion a month.

The bank expects the yuan's role to grow in prominence to match China's growing economic status, and says the global monetary system will be characterized by "tri-pod reserve currencies" made up of the U.S. dollar, euro and the yuan, in the long run.

ICAP's Ward agrees. While the yuan currently makes up a small percentage of the $4 trillion a day in the foreign exchange market, he says "it will eventually become the key trade between U.S. and Europe, and may replace dollar-yen and euro-yen".

"The timeline is unknown, but the direction has been set. So if you are in the foreign exchange business, this is the story and you want to position yourself to participate in that," Ward said.