source from:WSJ
WORLD  ASIA
Hong Kong’s Stock Exchange Aims to Launch First Yuan Benchmark Index
Yuan Index intended to help traders manage the risks around China’s currency, make money by betting on currency pairs



By GREGOR STUART HUNTER
May 25, 2016 7:03 a.m. ET
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Hong Kong’s stock exchange wants to create a benchmark index for the yuan to try to spur offshore trading of the Chinese currency, which has suffered setbacks as China slowly liberalizes the flow of money in and out of the mainland.


Hong Kong Exchanges and Clearing Ltd., the operator of the city’s stock and futures markets, and Thomson Reuters are looking at launching the first-of-its-kind index, which will track the value of the Chinese yuan against a basket of currencies made up of the U.S. dollar and several other major currencies.


The index—which will be launched next month—will give traders a barometer of the yuan’s strength, much as the U.S. Dollar Index provides a benchmark of the greenback’s global clout by measuring it against a basket of several major currencies.

Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd., said on Tuesday that the move is part of efforts to create “a massive trading ecosystem” around the Chinese yuan.


The exchange operator hopes the new index will promote trading of some of the currency pairs it plans to start this month on its futures exchange. These include the yuan against the U.S. dollar, euro, Japanese yen and Australian dollar.


“Once we launch the index and with the regulatory approvals, we’ll be launching index futures and options on that index,” Mr. Li said.


The idea is that traders will be able to manage the risks around China’s currency more effectively and make money by betting on the currency pairs underpinning the index.


Whether it will be that simple in practice is another matter.


China, concerned about how much money is flowing out of the mainland, has sought to keep a close rein over the yuan’s daily exchange rate. Each day, the central bank sets a daily “fix,” which serves as a central reference point for how far the onshore yuan can trade. Offshore, the yuan trades freely but generally doesn’t diverge far from the onshore rate.


This year, the government has quietly backpedaled from a major policy shift announced last August when the world’s second-largest economy said would make its currency more market-based.


Since last August, it has lost 5.5% of its value against the U.S. dollar, though losses stabilized earlier this year after a credit-fueled stimulus helped support the Chinese economy and the People’s Bank of China signaled to markets it aimed to keep the yuan stable against a basket of currencies.


The central bank has also tightened existing capital controls to limit the ability of businesses and individuals to take money out of China. Overnight borrowing rates for the yuan in Hong Kong briefly shot up to historic highs of 66.815% on Jan. 12 before returning to normal the next day as the central bank battled speculators betting the yuan would weaken.


The proposed index in Hong Kong appears similar to the U.S. Dollar Index, which was created in 1973, trades on Intercontinental Exchange, and tracks the currency’s strength against a basket including the euro, the yen, the British pound, Canadian dollar, Swedish krona and Swiss franc.


The U.S. Dollar Index is typically used by traders to measure the greenback’s appreciation or depreciation as the Federal Reserve adjusts interest rates, while investors can also hedge their portfolios against the risk of a sharp move in the dollar.


However, since its launch, traders have had little cause to worry about the Federal Reserve actively restricting trading of the U.S. dollar.


Still, some traders said products like the index of the yuan—also known as renminbi—would be helpful.


“More and more traders are paying attention to the renminbi index components, especially the euro,” said Patrick Ho, senior economist and global markets strategist at Bank of Communications Ltd, one of the biggest Chinese banks. “The yuan is de-linking from the U.S. dollar and so are Asian currencies.”


The yuan index in Hong Kong would sit alongside an unclear array of baskets used by China’s central bank to measure the strength of the renminbi.


The central bank’s China Foreign Exchange Trade System calculates its own weekly value, which serves as a guide to the markets for yuan trading, while the central bank has said in the past that it also monitors the yuan’s value against baskets of international currencies from the International Monetary Fund and the Bank for International Settlements.