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Recent Characteristics of FX Markets in Asia —A Comparison of Japan, Singapore, and Hong Kong SAR—

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Recent Characteristics of FX Markets in Asia —A Comparison of Japan, Singapore, and Hong Kong SAR— Bank of Japan Review 2020-E-3 Recent Characteristics of FX Markets in Asia —A Comparison of Japan, Singapore, and Hong Kong SAR— Financial Markets Department WASHIMI Kazuaki, KADOGAWA Yoichi July 2020 In recent years, turnovers of Foreign Exchange (FX) trading in Singapore and Hong Kong SAR have outweighed those of Japan, and the gap between the two cities and Japan continues to stretch. The two cities consolidate trading of G10 currencies by institutional investors and others by advancing electronic trading. Additionally, a number of treasury departments of overseas financial/non-financial firms are attracted to the two cities, contributing to the increasing trading of Asian currencies in tandem with expanding goods and services trades between China and the ASEAN countries. At this juncture, FX trading related to capital account transactions is relatively small in Asia partly due to capital control measures. However, in the medium to long term, capital account transactions could increase, which would positively affect FX trading. Thinking ahead on post-COVID-19, receiving such capital flows would positively impact on revitalizing the Tokyo FX market, thereby developing Japan’s overall financial markets including capital markets. to understand market structures and revitalize the Introduction Tokyo FX market, it would be beneficial to investigate recent developments in these centers. The Bank for International Settlements (BIS), in Based on above understanding, this paper compares cooperation with the world’s central banks, conducts the FX markets in Tokyo, Singapore, and Hong Kong the Triennial Central Bank Survey of Foreign SAR. The medium- to long-term outlook for Asian 1 Exchange and Over-the-counter Derivatives Markets . currency transactions will also be discussed. However, Survey results indicate that, among major Asian without adequate data and with high uncertainty, it is financial centers, turnover of Foreign Exchange (FX) not possible to discuss the implications of COVID-193. markets in Singapore and Hong Kong SAR have Nonetheless, the following discussion is reasonable to recently surpassed Japan, with the gap expanding in some extent for the medium- to long-term perspective, 2019 (Chart 1). Studies focusing on FX transactions in given that structural changes observed in the FX 2 the three Asian financial centers are limited ; therefore, markets will most likely carry forward. [Chart 1] FX turnover Comparison of the three Asian financial (Daily averages, in billions of US dollars) centers 700 Japan 600 Characteristics of turnover by counterparty Singapore 500 The Triennial Central Bank Survey collects data from Hong Kong SAR major financial institutions around the world (called 400 “reporting dealers”), covering comprehensive topics 300 consistent with international protocol. Japan’s turnover with non-financial customers, including corporations, 200 is slightly higher than the other two cities (Chart 2). 100 However, Japan’s turnover of financial customers and 0 other financial institutions, which includes institutional 92 95 98 01 04 07 10 13 16 19 investors and hedge funds, is fairly smaller. Source: BIS, “Triennial Central Bank Survey of Foreign Exchange and Over- the-counter (OTC) Derivatives Markets.” Note: As of April for each year. The same applies to charts below. 1 Bank of Japan July 2020 are relatively smaller. This may reflect the strong [Chart 2] FX turnover by counterparty (2019) presence of Japanese export and import companies in (Daily averages, in billions of US dollars) the Tokyo FX market that can cause biased transactions 450 toward receipt/payment of the U.S. dollar. Singapore 400 Hong Kong SAR 350 Japan [Chart 4] Changes in global FX turnover by 300 currency 250 (Daily averages, (Daily averages, 200 in billions of US dollars) in billions of US dollars) 15,000 1,500 150 2010 2010 2016 2019 100 2016 2019 50 10,000 1,000 0 Reporting Reporting Other financial Non-financial dealers, local dealers, cross- institutions customers 5,000 500 border Source: BIS, “Triennial Central Bank Survey of Foreign Exchange and Over-the-counter (OTC) Derivatives Markets.” 0 0 G10 currencies Japanese Asian Chinese yen currencies yuan Characteristics of turnover by currency pair Source: BIS, “Triennial Central Bank Survey of Foreign Exchange and Over- the-counter (OTC) Derivatives Markets.” Currency breakdown of FX turnover in Singapore and Note: “Asian currencies” include: Chinese yuan, Hong Kong dollar, Indian Hong Kong SAR indicates that trading shares of Asian rupee, Korean won, Singapore dollar, New Taiwan dollar, Thai baht, Indonesian rupiah, Philippine peso, and Malaysian ringgit. currencies and G10 currencies (advanced economy currencies) are high relative to Japan, and both contribute to the overall turnover increase (Chart 3, 4).4 Economic background of increasing FX trading volumes in Asia [Chart 3] Currency shares of FX turnover against the U.S. dollar (2019) In general, FX transactions are classified based on actual buying and selling (underlying transaction) and 100% on speculation. The former comprises current account 80% 2.9 Local and capital account transactions. Asian currency currency transactions have basically been centered on current 60% Asian currencies account transactions; therefore, FX trading volume has 40% 26.5 G10 aligned with trade in goods and services, given that currencies 20% 22.4 Others capital controls have restricted financial and hedging transactions to some extent6. 0% Japan Hong Kong Singapore SAR Developments in current account transactions Source: BIS, “Triennial Central Bank Survey of Foreign Exchange and Over- the-counter (OTC) Derivatives Markets.” Trade in goods and services in Asia excluding Japan Note: “Asian currencies” include: Chinese yuan, Hong Kong dollar, Indian has expanded more rapidly than in Japan, accelerating rupee, Korean won, Singapore dollar, and New Taiwan dollar. Other Asian currencies are listed as “Others” due to lack of breakdown current account transactions of Asian currencies (Chart information. Local currencies are excluded from “Asian currencies” 5). Singapore and Hong Kong SAR have attracted and “G10 currencies.” many regional headquarters of multi-national Regarding Asian currencies, the trading shares of corporations. Additionally, overseas financial the Chinese yuan and the Hong Kong dollar are high in institutions that have such regional headquarters as 5 Hong Kong SAR , while a wide variety of Asian customers have opened branches/subsidiaries in both currencies, including the ASEAN currencies, are traded cities. The regional headquarters are often in charge of in Singapore. Pertaining to the G10 currencies, the treasury functions that pay and receive money between ubiquitous use and advancement of electronic trading countries/areas in the region, contributing to FX has reduced transaction costs and increased trading turnover and diversity of traded currencies in the two both in inter-dealer market and dealer-to-customer cities. The U.S. dollar functions as an intermediary market, where a wide range of customers centered on currency in settling Asian currencies. For example, for institutional investors are quite active. In Japan, the the THB selling and the SGD buying, the transaction is USD/JPY pair accounts for more than 70% of total decomposed into two separately executed transactions: trading volume, while transactions of other currencies the THB selling and the USD buying, and the USD 2 Bank of Japan July 2020 selling and the SGD buying. The FX trading volume in the two cities benefit from both Asian currencies and [Chart 6] Changes in FX turnover against the U.S. the U.S. dollar trading amid expanding Asian current dollar (2016–2019) account transactions. (Daily averages, in billions of US dollars) 100 [Chart 5] Amount of trades and capital transactions Spot NDF FX swap Others 80 in Asia <Asia> <Japan> 60 (In trillions of US dollars) (In trillions of US dollars) 14 3 40 Amount of trades Amount of trades 12 Amount of capital Amount of capital 20 transactions transactions 10 2 0 8 -20 6 CNY HKD SGD KOR INR TWD 1 4 Source: BIS, “Triennial Central Bank Survey of Foreign Exchange and Over- the-counter (OTC) Derivatives Markets.” 2 Note: Abbreviations: CNY: Chinese yuan (including CNH, offshore Chinese yuan); HKD: Hong Kong dollar; SGD: Singapore dollar; KOR: Korean 0 0 won; INR: Indian rupee; TWD: New Taiwan dollar. 00 02 04 06 08 10 12 14 16 18 00 02 04 06 08 10 12 14 16 18 Source: IMF, “Balance of Payments.” have created a positive feedback loop of Asian Note: Asia comprises China, Hong Kong SAR, India, South Korea, currencies that reduces transaction costs, improves Singapore, Indonesia, Malaysia, Thailand, and the Philippines. “Amount of capital transactions” is the sum of inflows and outflows of liquidity, and increases total trade volume. direct investments and portfolio investments. In Singapore, leveraging its competitive tax rates Meanwhile, with USD/JPY trading by Japanese and advantages in IT talent8, the government and the financial/non-financial corporations, the transaction is Monetary Authority of Singapore have attached great usually completed within Japan. In contrast, for the importance to a variety of measures for the widespread Asian currency/JPY transaction that is decomposed use of electronic trading, including attracting matching into the Asian currency/USD and the USD/JPY, the and trading engines operated by major financial former pair is often run off from Tokyo to Singapore institutions. Additionally, the two
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