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New yuan trading hours: What you need to know

Yuan currency China
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China's currency, the yuan or renminbi as it's known, will see extended trading hours starting Monday in Beijing's latest effort to promote its currency on the international stage.

Instead of ending at 4.30pm local time, trading will now continue until 11.30pm while opening hours remain unchanged at 9.30am.

So, what does this all mean for the currency's outlook? Here are the facts explained.

Why is this happening?

The new hours will now overlap with Europe's trading day as the mainland seeks to make the yuan more widely used globally.

By allowing the yuan to trade alongside other major currencies, strategists say the People's Bank of China (PBOC) is accelerating its internationalization program following the International Monetary Fund's inclusion of the yuan in its basket of global reserve currencies in November.

Initially announced in October of last year, the new system is also part of a massive package of financial reforms Beijing is implementing as it opens up its economy.

Other recent measures include the launch of a new trade-weighted renminbi index, which would potentially see the PBOC abandon the U.S. dollar peg and let the yuan move in line with a wider set of currencies. Last week, the central bank also announced the introduction of a new "upgraded" mechanism to address macro-prudential risks in the financial system, called the Macro-Prudential Assessment System (MPA).

How will this impact the yuan?

Despite the boost in sentiment, the new hours aren't likely to impact actual yuan demand since European traders still won't be able to participate.

"This new system essentially allows more of the status-quo. It doesn't change the fact that the CNY remains inaccessible to the bulk of foreign players excluding offshore central banks," pointed out Nizam Idris, Macquarie's head of strategy, fixed income and currencies.

"There might be more interest but the foreign market still trades the offshore yuan (CNH), which will remain the case going forward."

Domestic participants, the same ones who dominated trading during the old hours, will still be influencing the yuan and the prolonged trading hours may not faze them.

"There will be a very clear uplift in volume from existing traders, but whether that manifests in increased demand remains to be seen," noted Robert Rennie, global head of FX strategy at Westpac Bank.

Moreover, the PBOC will still base the currency's closing level on its rate at 4:30pm since officials expect the bulk of trade to happen during daytime.

What does this mean for the offshore yuan?

The new trading hours are also aimed at converging the onshore and offshore rates, but that's unlikely to happen with Beijing's current restrictions on the former.

"A longer trading day could help bridge the convergence but its not a given. yuan liquidity is limited in offshore markets so by increasing opening hours, you would assume a convergence but practically speaking, it's difficult to envisage a situation where the PBOC get what they want quickly," said Rennie.

The difference between the two rates has sharply widened in recent sessions amid growth uncertainties, leaving the PBOC worried about traders seeking arbitrage opportunities from the onshore-offshore prices. Those fears likely resulted in central bank intervention, according to market chatter.

"The PBOC was suspected to have intervened in the offshore CNH market to support the yuan on Thursday, and has also suspended some foreign banks from conducting cross-border yuan trading ," Mizuho Bank economists said in a morning note.

"To us, we think it could be an interim measure to prevent speculative front-running in the onshore yuan as the central bank guides the USD/CNY fixing higher and converges with the USD/CNH price."

On Monday, both currencies tumbled to their lowest levels since 2011 after the PBOC set the CNY midpoint rate at a four-and-a-half-year low. The sharp drop combined with weak manufacturing data saw the Shanghai Composite slump over 7 percent in afternoon trade.

While the yuan is primarily traded on the mainland and is subject to strict central bank supervision, its offshore counterpart is accessible to everyone. Created in the early 2000s, the offshore yuan allows foreigners to settle trade and transactions in the currency, enabling Beijing to maintain a presence on the global finance stage while still granting the government control over the capital account.

The offshore rate also moves more freely than its tightly-controlled onshore counterpart, which is only allowed to rise or fall a maximum of 2 percent against the dollar relative to the official fixing rate.

In the long run, Beijing's focus is for the offshore yuan to be subsumed by the onshore yuan as part of its program to liberalize financial markets, but that requires basic convertibility of the latter—a structural reform long-awaited by economists.

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