China to Free Currency in 5 Years, Says Hong Kong Exchanges’ Li; central bank Governor Zhou Xiaochuan said yesterday in Beijing that the nation should be on “high alert” over inflation and reiterated gradual reform for the yuan’s convertibility

China to Free Currency in 5 Years, Says Hong Kong Exchanges’ Li

China, the world’s second-largest economy, will open its markets and allow its currency to float within five years, said Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd.

“China has to reform its interest-rate system,” Li said yesterday during a panel discussion at the Futures Industry Association conference in Boca Raton, Florida. The value of the Chinese currency is limited by the government and is only allowed to rise or fall within a narrow range. Li said that system can’t last forever.

Yuan forwards advanced for a seventh day on optimism China will embark on further currency reforms. The yuan traded near a 19-year high against the dollar as central bank Governor Zhou Xiaochuan said yesterday in Beijing that the nation should be on “high alert” over inflation and reiterated gradual reform for the yuan’s convertibility.

“Asia is the future for all of us,” Andreas Preuss, chief executive officer of Eurex AG, said during the panel discussion. He said the expected population growth in the region and the increase in average wealth would create demand for futures and options contracts.

Since China started a pilot program allowing the use of yuan to settle international transactions in 2009, the proportion of its trade conducted in the currency has increased to 9 percent from less than 1 percent, according to the People’s Bank of China. By 2015, a third of China’s cross-border trade will be settled in yuan, making the currency one of the three most used in global trading along with the dollar and euro, HSBC forecast this week in a report.

London Racing

London is racing against Paris and Zurich to become the center for yuan trading in Europe as China seeks to take its currency global. The Bank of England said it has the inside edge to be the first Group of Seven nation to sign a currency-swap agreement with the People’s Bank of China after a meeting last month. The deal may allow the U.K. central bank to supply as much as 400 billion yuan ($64 billion) to banks, matching Hong Kong’s swap arrangement, according to Gao Qi, a markets strategist at Royal Bank of Scotland Group Plc in Singapore.

Trading in exchange-listed derivatives worldwide fell 15.3 percent last year, compared with 2011, with interest rates, currencies and equity contracts all declining, the Futures Industry Association said earlier this week.

The central bank policy in the U.S. of holding benchmark interest rates near zero for more than four years has reduced demand from investors to hedge against an increase, hurting the volume of futures tied to the borrowing measure. Trading in CME Group Inc. (CME)’s Eurodollar future dropped 24.4 percent in 2012 compared with the year earlier, while NYSE Euronext’s Euribor contract fell 26.1 percent, FIA said.

Asia Drop

The largest drop geographically occurred in Asia-Pacific, with a 23.4 percent decline, according to FIA. Trading in North America fell 11.9 percent while in Europe futures and options on futures declined 12.5 percent.

CME Group, based in Chicago, was the largest futures market by volume, with 2.89 billion contracts changing hands last year, FIA said. Eurex AG was second, with a volume of 2.29 billion.

Contracts based on agricultural products and energy saw gains in 2012. Corn, soybean, wheat and other food-related products rose 27.5 percent last year, while futures on crude oil, natural gas and gasoline jumped 11.2 percent, FIA said.

Interest-rate contracts fell 16 percent, equity indexes dropped 28.5 percent and currencies fell 22.7 percent, FIA said.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.