Jon spoke at ASIFMA’s 7th China Capital Markets Conference, held recently in Hong Kong. The panel’s title was “China FX & Local Rates: Trends and Opportunities”

The panel was moderated by John Ball (GFMA), who looked at how to develop deeper, more liquid hedging instruments, onshore and offshore hedging strategies, and methods to improve electronic execution in China and the wider Asian market. A subject close to our hearts.

Jon’s takeaways below –

The overall theme of the panel was that there is no standard path to internationalisation and there are a lot of evolving issues and themes, resulting in many possibilities about how the market will evolve.

Although the RMB has joined the IMF’s SDR basket, which will increase the market’s appetite for RMB-denominated assets, this is not likely in the short or medium term as there is an expectation the currency will continue to depreciate.

It is estimated that about 1.5% of global FX reserves are currently allocated to RMB. This is expected to rise to about 5% (the equivalent of USD 125 billion p.a. over the next 5 years).

Electronic FX trading is still relatively low, even though the China Banks are able to offer their onshore customers single dealer platforms. The significant amount of documentation requirements have hampered the growth of eFX in China. There have been a number of developments to simplify the documentation requirements, the latest of which took effect in November 2016, but there is still a lot of work to do.

There was also discussion about China allowing a range of trading platforms to collaborate or compete with CFETS, increasing competition, improving efficiency and driving down the cost of trading.

Also, whilst FX options have been available since 2015 there has been a relatively small take-up. This is due to a lack of familiarity amongst onshore traders, and also a lack of access for the non-banks. The result is directional flow and a lack of risk warehousing, which all leads to wider spreads.

Finally, there was also talk about a Financial Transaction Tax (FTT), which could be imposed to drive speculators out of the market. The general feeling was that this increase in cost would most likely reduce the hedging of real economy end users, reducing liquidity and increasing financial risk in China.

In addition to Jon, the other panellists included Patrick Law (BAML), Mitul Kotecha (Barclays) and Jiong You (Citi)

AUDIENCE POLL – What product do the members of the audience prefer to use when hedging an RMB currency exposure?

A. CNH forwards 28%
B. CNH options 10%
C. NDFs 28%
D. CNY forwards 17%
E. CNY options 0%
F. Don’t hedge 17%

For more information click here