Offshore FX Instruments and Market

Hai Xin

4.1 INTRODUCTION

Up until mid-2010, offshore renminbi FX instruments were mainly non-deliverable forwards, together with other non-deliverable foreign-exchange and interest-rate derivative products built around the forward curve derived from the non-deliverable forward contracts. Liquidity has been gradually expanding over time, as interest in the Chinese economy and its currency has intensified. The market functions mostly under self-regulation and the main participants have been large global foreign-exchange banks, regional banks, offshore investors and hedgers, and, last but certainly not least, a fluctuating band of onshore players depending on the tightness of regulatory controls exerted by the mainland authorities. Foreign-exchange products usually trade in good liquidity up to two years and interest-rate products up to five years, but banks can go well beyond these periods – for a price. The resulting forward curve, or implied offshore renminbi yield curve, is mainly driven by expectations on renminbi appreciation, apart from occasional episodes of gloom and fear, where non-deliverable forwards would show an expectation of renminbi depreciation. Since 2005, more onshore