Hong Kong’s Chinese bond futures are a major step for the global yuan

On August 3, five-year Chinese treasury bond futures began trading on the Hong Kong stock exchange. Market attention has focused on the new product, but its real significance emerges when set against the deep shifts under way in the international monetary system.History offers a clear lesson: no currency has graduated from a trade settlement currency to a genuine investment and reserve currency on the strength of trade flows alone. Behind every reserve currency stands a government bond market of sufficient depth and a complete framework for managing the risks of holding those bonds. Low-cost interest rate hedging is an indispensable part of that framework.The Renminbi has largely answered the question of usability; it ranks fifth among global payment currencies, according to the Swift tracker. The more difficult test lies in whether the currency can be held and managed at scale. Foreign institutions held around 2 trillion yuan (US$296.2 billion) of Chinese government bonds as of the end of June, and access to the cash market has long been open through Bond Connect.