In the fast-paced, high-risk world of foreign exchange trading, where trillions of dollars change hands every day, there’s a quiet corner of the yuan market where traders can get some shut-eye, despite China’s efforts to elevate its currency to the top table.
The People’s Bank of China (PBoC) extended the yuan’s trading hours to 11:30pm in January to overlap with European hours after the International Monetary Fund (IMF) decided it would admit the yuan into its Special Drawing Rights (SDR) basket by next October, a key step on the way to becoming an international reserve currency.
But there is a yawning disconnect between the currency’s new status and the level of interest in the after-hours market.
“It can be really boring and lonely sometimes,” said one night trader at a bank.
He said he kept an eye out for rare incoming orders but spent most of his time watching online videos to alleviate the boredom of being stuck on his own until bedtime.
Other night traders who spoke to Reuters said they processed around five orders in the last three hours, which has led some banks not to bother staffing the shift.
“One key problem is there is no corporate demand,” said a trader at a major European bank in Shanghai. “Few companies feel the urgency to follow global market movements closely.”
Because of China’s capital controls and central bank efforts to curb exchange rate volatility, there is little speculation in the domestic market, traders say.
Some state-owned banks are trading in the evening sessions on behalf of the central bank to keep the yuan steady, according to a trader at a Chinese commercial bank in Shanghai.
“Every time when the evening rate appeared to go out of hand, you could sense the signs that state-owned banks are intervening in the market on behalf of the PBoC,” he said.
Yuan/dollar quotes in the late session rarely stray more than 50 pips from the rate at 4:30pm, regardless of what happens to the yuan traded in offshore markets, traders said.
And trading between the yuan and other currencies such as the yen and euro, is nearly non-existent in the night session, they added.
The relatively steady exchange rate means many corporates don’t bother to hedge their foreign exchange positions during the late session because the rate tends to stay put.
“The market still behaves like it closes at 4:30pm,” said a dealer at another European bank, adding that his bank recently decided its night trader would end his shift at 9:30pm.
There is also a dearth of overseas investors in the Chinese market, despite Beijing’s efforts to widen access for foreigners, partly to satisfy the IMF that the yuan was eligible for its SDR basket.
In November, China allowed the first batch of foreign central banks, sovereign wealth funds and international financial institutions to register to enter the market.
“Right now it’s only a trial to meet the IMF standards,” said a trader at another Chinese commercial bank in Shanghai.
“We have to wait for more policies from the government to encourage market participation, such as introducing brokers and individuals to encourage competition.”
A trader from a third European bank said: “I believe when the new SDR basket takes effect late this year, the evening trading may pick up, along with more reforms on the way.”