China to extend onshore yuan trading hours next year in major reform

Jason Lee | Reuters

A vendor holds Chinese Yuan notes at a market in Beijing.

China's central bank said on Wednesday it would extend the yuan's trading hours on the Shanghai-based foreign exchange market from Jan. 4, in a major step forward on reforms that will help onshore and offshore rates converge.

The extension will also allow trading in the Chinese forex market to overlap with European trading hours in Beijing's latest effort to internationalize its currency, traders said. Reuters cited the central bank's plans to extend trading hours, in October, citing market sources.

The government is aiming to make the yuan a more widely used global reserve currency after the International Monetary Fund announced the yuan's admission into its benchmark Special Drawing Rights basket in November, traders said.

"To make the yuan a global reserve currency you need to make it trade along with other major world currencies," said a trader at a European bank in Shanghai.

"This is the first step to move towards making yuan trading hours in line with currencies such as the dollar, euro and yen."

The IMF, the SDR and the yuan explained

The People's Bank of China (PBOC) said in a statement on Wednesday it would also allow more overseas banks to enter the domestic interbank forex market, the ChinaForeign Exchange Trade System (CFETS), which is a unit of the PBOC.

Trading hours for the yuan in CFETS will last until 11:30 p.m. local time (1530 GMT) as of Jan. 4 rather than end at 4:30 p.m., the central bank said. Opening hours will remain unchanged at 9:30 a.m.

Thin evening trade expected

The central bank said the yuan's closing rates will be the level at which it is quoted at 4:30 p.m. local time to the surprise of some market players.

It said it expects evening trading sessions to be thin initially, which traders agreed with.

"To make evening sessions as active as trading during the days you need huge demand for the yuan," said a trader at a Chinese commercial bank in Shanghai.

"Such a situation may take years to reach and is unlikely to occur until the yuan is somehow a global reserve currency."

CFETS, however, will announce the yuan's reference exchange rates during the evening session seven times each on the hour from 5:00 p.m. to 11:00 p.m., the central bank said.

A trial of extension of the yuan's trading hours started on Wednesday, traders said.