HKEx’s CEO warns of RMB volatility

China’s currency is set for more turbulence according to Charles Li, the CEO of Hong Kong Exchanges and Clearing.

China’s currency is set for more turbulence according to Charles Li, the CEO of Hong Kong Exchanges and Clearing (HKEx).

The renminbi (RMB) has recently been moving more than usual relative to the US dollar. On 10 March it opened for trading at RMB6.12/US$1, which is roughly midway between the currency’s 52 week high and low of 6.22 and 6.03 respectively.

The central bank sets a fix around which the currency can trade higher or lower by one percent each day. Over three weeks the currency fell 1.4%, more than it has done since new foreign exchange rate policies were introduced in 2005. It bucks the recent trend of the RMB’s gradual appreciation.

Charles Li says in his blog that he expects the RMB’s internationalisation to only pick up steam in the months and years ahead, meaning that RMB volatility is here to stay.  

“Some believe the depreciation may be the result of the People’s Bank of China (PBOC) wanting to shake out speculators,” he said. “Others say it may be in preparation of a wider trading band; while some believe China may be choosing to devalue the currency for domestic reasons.  In my view, the reasons behind the change are secondary.” 

The PBOC appears for now to have ceased its current mission to push the currency lower. A pattern is emerging of swift central intervention or policy suasion, be it short term interest rates, or guidance on lending, which appears, spooks the market, but then disappears before any lasting effect sinks in or lessons learned.

Li pointed out that RMB deposits in Hong Kong have risen sharply, from around RMB60 billion in 2010 to RMB893 billion in January 2014.  Trade settlement by banks in Hong Kong has grown from a tiny amount in 2009 to RMB3.8 trillion in 2013.

The business point to Li’s message is that HKEx has put in place risk management tools for RMB holders and investors, that help to mitigate currency volatility.

Average daily volumes in February 2014 in HKEx’s RMB currency futures contract showed a record high of 1,461 contracts (US$146 million notional), up 500% from the average daily volume in 2012.  There was also a single day record of 5,970 contracts traded (US$597 million notional) on 25 February. 

The exchange is also looking at extending the maturity of RMB currency futures to manage longer-term risk exposures beyond 16 months.