If China gets rid of capital control, Yuan could become one of top three currencies (along with dollar and euro).
The Chinese yuan has rocketed into the top 10 of most frequently traded currencies for the first time, the Bank for International Settlements said in its triennial survey of turnover in foreign exchange.
In a rapidly growing global currency business, which the BIS said now generates $5.3 trillion a day in flows, up from $4 trillion in 2010, the yuan climbed to ninth place from 17th three years ago. Offshore trading in the currency drove this expansion, the BIS said in its report of the survey, which was carried out in April.
The Mexican peso also regained a top-10 place, in eighth, for the first time since 1998, demonstrating the breadth of the rise in emerging-market currencies. Both currencies roughly doubled their share of the market to edge the Swedish krona and Hong Kong dollar out of the top 10 and overtake the New Zealand dollar. The Russian ruble, Turkish lira, South African rand and Brazilian real all also accounted for a bigger slice of global flows, albeit on a smaller scale.
This rapid growth reflects the development of international trade and investment in developing-market currencies as a whole, and underscores why banks and financial centers around the world are so keen to grab a slice of offshore yuan trading.
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"As reforms continue to take place in emerging markets to further internationalize their economies, cross-border finance will grow and will drive more volumes into the FX market for everybody," said Derek Sammann, senior managing director of foreign-exchange at CME Group Inc. CME -0.38%
Since China made Hong Kong its first offshore trading center for its currency in 2009, competition has been fierce among global and regional financial hubs to become the next city to host a landmark experiment that aims to make the yuan, also known as the renminbi, a serious rival to the dollar's supremacy in global trade. Singapore and London have emerged as the leading candidates, with Tokyo, Sydney, Luxembourg and Kuala Lumpur also vying for a spot.
"The renminbi has been a big growth story over the last year," said Richard Anthony, global head of foreign-exchange electronic trading at HSBC in London. "Trading volumes are increasing not only from corporate clients off the back of global trade but also from the investor community."
Trading in the Chinese currency swelled to $120 billion a day in 2013, up from $34 billion in 2010. Still, trading in yuan remains small in comparison with that of the top currencies. Dollar trading averaged $4.652 trillion a day, the euro averaged $1.786 trillion and the yen $1.231 trillion.
Even though the yuan has expanded its role rapidly, there are significant barriers to its wider use, notably a tightly controlled capital account, which prevents foreigners from easily holding yuan assets, and concerns about transparency and governance that mean many yuan assets appear unattractive to foreign holders.
Trading in the Mexican peso—a favored bet for funds in recent months—surged to $135 billion a day in 2013, according to the BIS, which gathered the data with input from central banks and authorities in 53 jurisdictions and 1,300 dealing banks around the world. The Korean won and Polish zloty accounted for slightly smaller shares of the growing overall market compared with 2010.
In developed-market currencies, flows in the Japanese yen also shot higher in this year's survey, with turnover surging by 63% from 2010. Trading in the dollar against the yen was up by about 70%, the BIS said. The survey was conducted in April in the midst of a heavy drop in the yen driven by newly easy monetary policy from the Bank of Japan, a shift that drew a large number of bets against the currency.
"A lot of hedge funds have been active in this yen move through the options market," said Jeff Feig, global head of major currencies at Citigroup Inc. The overall expansion of this market "re-emphasizes the rationale for continuing to invest in our [foreign-exchange] franchise."
According to the annual Euromoney market-share survey, Citigroup is the world's largest dealer in spot foreign exchange—the core part of the market— and the biggest dealer in emerging-markets currencies.