Offshore yuan market may evolve like Eurodollar market

The emerging offshore yuan--or reniminbi--market could be mostly used in the future to channel renminbi-denominated funds between borrowers and lenders not resident in mainland China, the Bank for International Settlements said in its quarterly review published Sunday.

Drawing on the experience of the market for Eurodollars, which are U.S. dollars deposited in banks outside the U.S, the BIS said it expects the offshore renminbi market to evolve much like other types of offshore markets and to behave over time as an intermediary between non-resident borrowers and lenders of renminbi.

Currently, the offshore renminbi market mainly serves as a conduit for funds from the rest of the world to mainland China. Its use as an intermediary between non-mainland borrowers and lenders or for mainland residents investing in offshore renminbi assets has been limited, the Basel-based BIS said.

The report, authored by Dong He of the Hong Kong Monetary Authority and Robert McCauley of the BIS, found that in the long run the Eurodollar market has primarily delivered pure offshore intermediation among non-residents. That is, it has permitted dollar-denominated transactions between non-U.S. residents outside of the U.S. and beyond U.S. jurisdiction.

"If the renminbi offshore market were to follow the Eurodollar market, this pure offshore intermediation would rise," they said.

The report added that the renminbi of late hasn't been appreciating consistently against the dollar. That might encourage non-resident borrowing in the currency, which in turn would also help the development of the market.

In the offshore yuan market in Hong Kong, where the Chinese currency floats freely, the dollar was at CNY6.3670 late Friday. The central parity rate for the onshore yuan was fixed by the People's Bank of China at CNY6.3308 Friday; the yuan can be traded in a band that is 1% above and below that level.