Yuan midpoint/spot divergence to change hedging trends-StanChart

HONG KONG, Oct 8 (Reuters) - The divergence between theyuan's official midpoint fixing and spot rate due to itsexpanded trading band will shift more business to the offshoreyuan deliverable (CNH) market from the non-deliverable forward(NDF) market due to a need to hedge exposure, Standard CharteredBank said on Monday.

The NDF market, directly linked to the midpoint set by thePeople's Bank of China (PBOC) each day, was frequently used byforeign firms before the CNH market was launched two years agoas it was one of the few ways to reduce yuan currency risks.

However, with the yuan's daily trading range against thedollar extended to 1 percent from 0.5 percent, it is common forthe spot rate to deviate more and more from the midpoint, makingcorporates with NDF contracts less protected.

The yuan is allowed to rise or fall 1 percent against thedollar on a daily basis from a midpoint set by the PBOC.

"The change in the performance of the exchange rate onshoremeans the NDF market is going to be less important going forwardand there will be more focus on CNH trading in the offshoremarket, either in spot, forward or options markets," RobertMinikin, senior FX strategist at Standard Chartered, toldreporters.

The PBOC expanded the yuan's daily trading band against thedollar in April, in a milestone move underscoring its ambitionto internationalise the use of the Chinese currency.

The CNH spot and forwards markets are both deliverable andallow for corporates to better hedge risks, while the close linkbetween the two markets is also clearly desirable, he added.

Onshore yuan weakened slightly against the dollaron Monday after touching a record high of 6.2812 in early tradeand nearly hitting the upward trading limit of 1 percentcompared to the fixing of 6.3426.

Standard Chartered expects the yuan exchange rate to standat 6.31 and 6.19 at the end of 2012 and 2013, respectively,since weakness in the export sector remains a concern and noclear appreciation trend is seen for the yuan this year.


The central banks of China and Taiwan signed an agreement ona clearing system for each other's currency in September andTaiwan banks have been sparing no effort preparing to seizeopportunities arising from offshore yuan business.

Market players in Hong Kong are worried Taiwan'sparticipation may divert fund flows from the territory, as someTaiwan corporates which used to rely on Hong Kong for yuan tradesettlement may switch to Taiwan.

However, Kelvin Lau, regional economist at StandardChartered, did not see direct competition from Taiwan. Hebelieves Taiwan's yuan market development lies more with localbanks taking part in the new business and drawing in yuan fromthe mainland China.

"Taiwan has its own channel to build up yuan liquidity,which makes it less likely to divert funds and business fromHong Kong," Lau said, noting more yuan outflows from themainland will also benefit Hong Kong.

The bank expects yuan deposits in Taiwan to grow rapidly inthe first year, reaching 150 billion yuan ($23.9 billion) by theend of 2013, though it would still be only 2 percent of totaldeposits. It could rise to 5 percent of the deposits by 2015before eventually topping out at 30-35 percent.

Yuan deposits in Hong Kong stood at 552.3 billion yuan($87.63 billion) by the end of August, representing 8.7 percentof total deposits.

($1 = 6.2849 Chinese yuan)

(Reporting by Michelle Chen; Editing by Jacqueline Wong)

((michelle.chen@thomsonreuters.com)(+852 2843 6587)(ReutersMessaging: min.chen.thomsonreuters.com@reuters.net))