Euromoney, January 18 2019
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When Singapore Exchange issued its full-year trading numbers for 2018 last week, one number stood out.
Dollar/CNH futures trading – referring to offshore renminbi – hit a total of US$534 billion, a 181% year-on-year increase over 2017. The figure for December alone was US$65.4 billion, a record. The contract is now shifting US$2.17 billion a day in average daily volume, and crossed US$1 billion on 238 days last year, compared to 54 days in the previous four years.
There is a sense of offshore renminbi trading having suddenly hit critical mass in Singapore. It has taken a while: the SGX began a complex of FX pairs five years ago, embracing rupee as well as renminbi, and today has 19 currency pairs listed on the exchange, but it is USD/CNH that dominates. “We have seen massive growth,” says Lam Kok Chong, head of FX and rates at the SGX. “It has been two-digit growth every year.”
For an exchange that is in severe need of alternative sources to growth than equity listings, the offshore RMB is a useful currency to be well-positioned in. The latest RMB Tracker report from Swift shows that the RMB now ranks fifth as a domestic and international payments currency behind the dollar, euro, pound and yen, with 2.09% of volumes in November 2018; and eighth as a purely international payments currency.
Hong Kong clearly dominates offshore RMB payments, accounting for 78.66% of the market in November 2018 according to Swift, but Singapore now ranks third with 3.81%, lagging the UK but ahead of the US, Taiwan, France and other centres. In terms of countries doing FX transactions in RMB, Singapore accounts for 5.58% of the market, according to Swift, behind the UK, Hong Kong, US and France.
And it’s in the futures sector that Singapore really has stolen a march. As of the end of 2018, SGX believes it is the largest offshore exchange for CNH futures.
Last year was a good one for anyone selling renminbi-dollar hedging products, and this year could see more of the same. “Seaborne iron ore is a commodity that China is using to build the Belt and Road Initiative,” says Lam. “Much of it is coming from mines in Australia and Brazil, and being imported by Chinese customers over a shipping time that can be several months.” Hedging that exposure is vital: commodity traders like this account for almost 30% of SGX’s entire volume for CNH, Lam says. “That has been an anchor for demand.”
On top of that, the opening up of StockConnect to Hong Kong has prompted more and more people to trade onshore stocks, and with it a need to hedge that onshore exposure. Onshore energy, and the Dalian Commodity Exchange, have become more open to foreigners too, who also have to hedge. CTAs and other technical funds have started to take notice. “They are saying: this is serious liquidity, let’s start trading it,” Lam says. This liquidity is helpful for traders in the US and Europe who need to know contracts are liquid even outside of their usual trading hours.
Themes like this are exactly the reason the SGX appointed Loh Boon Chye, who had run the markets business at Deutsche Bank, to become CEO in 2015. With so many major companies in Singapore already listed, and new entrepreneurial companies either opting to stick with private funding or going straight to Nasdaq, there was a pronounced need for new engines of growth.
So the first quarter numbers for financial 2019, which showed record derivatives income of S$98 million, up 21%, at the same time as equities and fixed income revenue that fell 13% to S$86 million, is illustrative of the exchange’s likely future. Total derivative volumes were up 17% year on year in the first quarter, with overall FX futures volumes up 75% year-on-year from 2.9 million to 5 million contracts.
It’s striking that INR/USD futures are also starting to look significant. Full-year volumes for 2018 were US$374 billion, up 53% year on year. SGX now has a leading position in this contract offshore.
Outside of foreign exchange, 2019 is set to be a key issue for the integration of onshore assets into the international mainstream. “2019 will kick off a multi-year inclusion process across onshore equity and bond,” says BNP Paribas in a report issued on January 16. Inclusion in the FTSE Russell and S&P Dow Jones equity indices, and Bloomberg Barclays bond index, is confirmed; a weight increase in China A-shares in the MSCI equity index is likely; and there is potential for inclusion in the JP Morgan and FTSE Russell bond indices.
Fang Xinghai, deputy head of the China Securities Regulatory Commission, said on January 12 that foreign inflows into China A-shares could reach RMB600 billion (US$89 billion) in 2019, which is double the net foreign buying that took place on Stock Connect in 2018. There is great scope for growth here: according to BNP Paribas, foreign ownership of Chinese A-shares is just 3.5%, compared to 31.3% of the Korean equity market and 39.4% of Taiwan’s.
One other key development was the 60% increase in CNY reserve holdings in 2018, driven by the Central Bank of Russia shifting some of its assets to renminbi.