China's yuan shifts into currency major league

* Yuan offshore trading seen growing strongly again in 2015

* Currency breaks into top 5 currencies on EBS platform

* Liberalisation has some way to go, companies take dual approach

By Patrick Graham and Yana Naginsky

LONDON, Jan 14 (Reuters) - After a surge in interest last year, China's yuan is heading for the currency major league, with trading volumes more comparable to the euro, sterling, Australian dollar and Swiss franc than its emerging market peers.

Offshore trading in the yuan, whose convertibility is still tightly controlled by Beijing, soared some 350 percent on Thomson Reuters trading platforms in 2014.

Rival platform EBS - the main venue for dollar, yen and euro trading - told Reuters the yuan ended last year as one of its top five traded currencies.

That compares to 9th in the Bank of International Settlements most recent study of global currency flows from 2013 and 7th in Belgium-based global payment network Swift's ranking of currencies most used in trade.

The system of controls kept in place by Beijing, including separate markets offshore (CNH) and onshore (CNY), continues to limit action, but bankers in London say the currency is steadily moving to the front of minds on the big money G10 desks at the centre of the $5 trillion a day global currency market.

"CNH is really the only growth area we have at the moment," said a G10 spot trader with one large international bank in London, asking not to be named. "You can talk about China as an emerging market if you want but for most people it has just become too big to ignore."

The surge in interest has been fuelled by rapid growth in offshore yuan centres established by Beijing from Sydney to Canada. None of the major foreign exchange platforms break down volumes by currency but Reuters and EBS are the two largest multi-player venues.

"As a currency on EBS, at the beginning of 2014 it was within the top 8 and by the end of the year it was in the top 5," said Daryl Hooker, spearheading EBS' push into the yuan, also known as the renmimbi, as the company's Head (Other OTC: HEDYY - news) of Strategic Currency Initiatives.

"If I was to stick my neck out, I would say volumes in the renminbi this year could double. I wouldn't be at all surprised if we exit this year at $20 billion a day."

DILEMMA

EBS's estimate of $10-12 billion daily yuan turnover on the interbank market chimes with that by HSBC, one of the leaders among international banks in China. Deutsche Bank (Xetra: 514000 - news) say the spot market should average around $6 billion daily this year.

Bank of England figures show London-based dollar-yuan trade was still topped as of April last year by a number of other emerging currencies. http://link.reuters.com/net73w

But the latest City of London (LSE: CIN.L - news) figures, covering the first half of 2014, suggest yuan volumes already stretch into tens of billions daily, factoring in forwards, swaps and trade done within the biggest banks. http://link.reuters.com/wet73w

The London report also suggests as much as half of all yuan offshore spot trade is now London-based. A flurry of activity around a fall in the yuan last March briefly made it the second most traded currency on Reuters.

"It isn't just a China story - it's an Asia story," says Phil Weisberg, global head of foreign exchange at Thomson Reuters. "We saw a massive upsurge in renminbi trading last year and we see volumes growing in many other Asian economies as well."

Last year was the first time the yuan has weakened against the dollar since exchange rate reforms in the early 1990s and the resulting uncertainty fuelled volumes. But the more freely-traded currencies of Taiwan, South Korea and Indonesia slid by 4-7 percent while the yuan fell by just 2.7 percent.

"China's foreign markets are slowing, so my view is they have no choice but to devalue the currency," says Michael Howell, managing director of consultancy CrossBorder Capital. "In 2015 ... it could be by as much as 10 percent otherwise they won't be able to get out of this situation."

David Cui, Singapore-based managing director, global research for Bank of America Merrill Lynch advised caution: "They will want to weaken the currency but they will have to be mindful the inflows don't turn into massive outflows."

CORPORATE RESPONSE

Dealers in London say European corporates are still running a two-track approach to trade with China.

Lee McDarby, executive director of UK corporate FX sales at Nomura in London, says the majority of small to medium-sized British importers he services continue to pay suppliers in dollars at an agreed rate to the yuan value of deals.

"It is still difficult to access yuan in size, but once the cost savings in doing so become more attractive we will see more people choosing to deliver yuan," he said.

A trader at another major Japanese bank, whose clients include some of Europe's largest companies, said most were now settling in yuan in Hong Kong.

That reflects a system still in flux.

Deutsche Bank, the world's second largest trader of currencies and the heart of the market in Europe, expects robust growth in trading volumes on the back of more offshore clearing centres and greater access to more yuan-denominated investments in 2015, predicting full convertibility in 2020.

The planned rollout of a global Chinese clearing system will prompt a big expansion and a major alternative to the offshore centres, but development problems have set it back. (Additional reporting by Pete Sweeney in Shanghai and Saikat Chatterjee in Hong Kong; editing by Philippa Fletcher)