Speculation sees trade in yuan running hot

LONDON - Trading in China's yuan jumped has more than six-fold in three years as investors bet on the currency appreciating and turnover could be higher still, says the Bank for International Settlements.

The BIS, a bank for the world's central banks, said in its quarterly report on the foreign exchange market on Monday, that daily yuan or renminbi turnover rose 530 per cent in the three years since 2001 to US$1.812 billion ($2.52 billion).

"The rapid expansion of renminbi turnover coincided with a period of heightened expectations of further currency regime reform, which was often presumed to imply a prospective appreciation of the Chinese currency," said the Swiss-based bank.

The surge in domestic turnover was driven by an offshore market in non-deliverable forwards (NDFs), the most popular way for foreign investors to speculate on a revaluation. "Formerly this NDF market was thin, with trading of only a couple of hundred million dollars' worth of contracts per day," the bank said. "But daily turnover can now hit a billion dollars or more."

Largely domestic spot currency trading turnover averaged US$992 million a day, while daily trading of forward contracts averaged US$811 million, the bank said. Trading in swaps averaged US$9 million a day.

Some countries, particularly the United States, say China's currency - pegged near 8.28 to the dollar - is undervalued and gives the country an unfair trade advantage.

The bank said the actual yuan daily turnover could be at least double its reported number due to flaws in data collection.

Reported domestic turnover data covers only spot trading among members of the Shanghai-based China Foreign Exchange Trade System, which includes most domestic and foreign-owned banks and a few non-bank financial institutions such as funds.

However, it does not capture spot trade between banks outside the system and forward trading, or transactions involving most non-bank financial institutions and non-financial counterparties.

"It is not difficult to produce an estimate that would be double the total reported renminbi turnover," the report said.

- REUTERS