As the yuan becomes more internationalised and integrated into global markets, it has become necessary for foreign players offering services for traders to extend these services to those trading or settling in the Chinese currency.
One company taking this approach is British firm ICAP, which provides services and platforms for foreign exchange (FX) and fixed income trading. In June ICAP was chosen by the China Foreign Exchange Trade System (CFETS), China’s official inter-bank market trading platform and infrastructure provider, to deliver the underlying technology for fixed income and FX electronic execution services on the mainland.
Speaking exclusively to the South China Morning Post last week, ICAP chief executive Michael Spencer, on his way to a further meeting with CFETS, described the deal as “very exciting”.
ICAP first started working with CFETS 10 years ago, setting up a joint venture in Shanghai, and even back then it seemed necessary to be in China.
“As the world’s leading interdealer broker, it would have been a major strategic fault not to set up an operation in China,” said Spencer.
Since then the role of the yuan in FX markets and global trade has grown significantly. According to the Bank of International Settlement’s triennial survey published earlier this month, as of April 2016 the yuan had overtaken the Mexican peso to become the most traded emerging market currency. In that month, the yuan’s average daily turnover stood at US$202 billion, up from just US$34 billion in 2010; making it the eighth most traded currency in the world.
The competition to provide the platforms on which this trade takes place, and provide services to the traders themselves is fierce, both in Hong Kong, as well as in major FX trading centres around the world. ICAP itself is changing too, and by the end of this year will have transformed itself into primarily a financial technology company under the name of NEX group.
In August this year, the yuan regained its position as the fifth most used currency for payment from the Canadian dollar, according to SWIFT data. At one point – in August 2015 – the Chinese yuan had overtaken the Japanese yen to be the fourth most used currency for payment, but it has since slipped back, partly due to its sudden devaluation last summer.
Nonetheless, ICAP’s Spencer is optimistic that the yuan will continue to internationalise.
“I think there are strong structural growth prospects for the yuan’s internationalisation, even though the pace is slowing at the moment,” he said.
“I expect that in the future the yuan will be one of two global reserve currencies.”
On October 1 the yuan made an important symbolic step towards this reserve currency status by being included in the IMF’s special drawing rights (SDR) basket.
Commenting on the move, Standard Chartered’s regional chief executive officer, greater China and north Asia, Benjamin Hung said: “We are confident that China will continue liberalising the currency at an appropriate pace and that the yuan will become the third major currency in the world by 2020.”
Should this prediction prove to be correct, there will be much more yuan trading, requiring a greater number of companies both in China and around the world to service this trade.