SPECIAL REPORT: RENMINBI INTERNATIONALIZATION
Fast-paced developments in China and overseas are bolstering the renminbi’s international expansion.
Nothing reflects the renminbi’s accelerating trajectory toward status as a global currency than the competition that emerged in the final days of March between London and Frankfurt to become the first clearing hub for the “redback” outside of Asia.
The Bank of England announced on Wednesday, March 25, that it would sign an agreement with the People’s Bank of China for the creation of a renminbi clearing bank in London. But news leaked out the following Monday that Germany’s Bundesbank and the PBOC had put pen to parchment the previous Friday, quashing the United Kingdom’s drive to be first.
Both nations, as well as Luxembourg, are eager to set in place what Hong Kong initiated in July 2009, when it unveiled its pilot scheme for cross-border settlement of renminbi (the Chinese territory marked its 10-year milestone as the first territory for renminbi banking services in February). Setting up a clearing hub effectively builds a financial bridge between markets, allowing for settlement of interbank payments, development of foreign-exchange-related financial instruments, and improving trade links.
The European Union is China’s largest single trade partner, but as China liberalizes its financial sector and the internationalization of the renminbi continues, Europe’s finance hubs are eager to solidify financial ties with China—and attract investment. London already handles 60% of the renminbi foreign exchange market outside of China, but it is facing increasing competition for that business.
If Europe’s financial centers are implicitly embracing the notion of the renminbi’s dominance, institutional investors are openly doing so. In a survey launched in February this year of 200 onshore China and overseas international investors by the Economist Intelligence Unit and State Street, 53% of the respondents said they believe that the renminbi will one day surpass the US dollar as the global reserve currency. Their view of financial liberalization—a key element in the evolution of the renminbi toward full internationalization—is sanguine. Two-thirds of respondents expected China to complete its financial liberalization in 10 years, with a majority expecting key reforms to be completed in five. The confidence in the currency’s future is weighted toward China’s onshore respondents.
Referring to the majority response about the renminbi’s trajectory toward replacing the greenback, Jeremy Armitage, Asian head of sales, trading and research for State Street, says: “If we were to do the poll today, it would be higher than that.”
“It’s about the consistency of messaging in the transition, and [the government’s] actions have matched its words,” Armitage adds, citing the bond default by China’s Chaori Solar Energy Science and Technology, the nation’s first default on a domestic bond, as an example. There was in the past an implicit guarantee on high-yield debt in China, but the government signaled that it would not intervene—and didn’t.
Even with skeptical offshore institutional investors, the stability of the currency is not questioned. Joon Hyuk Heo, head of global fixed income for Mirae Asset Global Investments, notes: “The Chinese government can control the FX market easily without a significant side effect. The renminbi is still one of the most stable currencies in the EM market.”
Nevertheless, Armitage argues, the government has signaled that the transition is under way, and that the era of the steady exchange rate will eventually dissolve. “That’s a free lunch that clearly doesn’t exist anymore,” he says. Institutional investors will have to start thinking of the renminbi “as they do other developed currencies—like the Australian dollar or the pound—for forecasts of volatility [and] how they think it’s going to correlate for mainstream investment decisions.”
The speed of the currency’s growing international acceptance can be tracked by Standard Chartered’s Renminbi Globalisation Index. The measure is based on deposits, trade settlements and other international payments, as well as dim sum bonds, certificates of deposit and foreign exchange turnover. The index has risen 14 times since the beginning of 2011. Hong Kong, Singapore and London were added in 2011, Taiwan was added last year and New York, in the beginning of March.
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which also tracks the currency’s internationalization through its RMB Tracker, recently noted another renminbi milestone: Last year the currency became the second-most-used currency in global trade finance after the US dollar.
SHANGHAI FTZ: CORPORATE TREASURY CENTRAL
Observers of the pace of internationalization have their eyes on developments in the Shanghai Free Trade Zone, initiated last year. The People’s Bank of China unveiled a series of financial policy guidelines in December that allow companies situated in the Shanghai FTZ to conduct centralized payments and collections between associated onshore and offshore entities. In February 2014, the central bank took its first steps toward interest rate reform, easing controls on offshore renminbi borrowing, as well as controls on capital accounts held by foreign direct investors within the FTZ. The success of these measures and the continuation of easing will be crucial to the government’s “messaging,” noted Armitage.
|Armitage, State Street: The era of the steady exchange rate will eventually disappear.|
The moves also set the stage for major advances in multinationals’ cross-border treasury operations. Restrictions to cross-border cash flows impose limits on the ability of both foreign multinationals and Chinese homegrown companies venturing abroad to gain optimal value from their presence in the world’s second-largest economy.
“The Shanghai FTZ allows participation of local cash in a cross-border solution,” explains Amol Gupte, the Asia-Pacific transaction services head for Citi. “Now we will be able to weave together global and local capabilities in an opening market.”
Both Citi and HSBC were quick to initiate pilot programs with longtime multinational clients that allow for cross-border treasury center solutions in the FTZ.
Citi announced a project with Swiss-based global life sciences firm Roche in late February. Roche will be able to use its Shanghai FTZ entity to consolidate renminbi cross-border transactions and use a netting solution to settle with their offshore treasury center. Gutpe says this will improve Roche’s capital utilization efficiency and lower the cost of cross-border transactions, intragroup financing and foreign exchange.
Also in February, HSBC, the largest international bank in mainland China, announced a pilot with France-based construction firm Saint-Gobain for renminbi-denominated cross-border payments and collections. A month earlier, HSBC had introduced renminbi two-way cross-border sweeping in the Shanghai FTZ.
Meanwhile, Deutsche Bank consolidated all its renminbi services within the bank under one umbrella, and Singaporean bank DBS has taken a lead in renminbi private banking services in the region.
DBS has also, not coincidentally, climbed in the leagues tables this year in issuance of offshore renminbi bonds. Offshore bond sales have been running hot. They amounted to
$24.5 billion from year-end to mid-March, up 71% from the same period in 2013. As of mid-March, DBS was the fourth-largest arranger of offshore renminbi-denominated notes, according to Bloomberg.
SINGAPORE HOT SPOT
DBS is making the most of Singapore’s appointment a year ago of a renminbi clearing bank for the city state, putting Singapore on the same footing as Hong Kong and Taiwan.
“Hong Kong has had several head starts already,” says Clifford Lee, DBS’s managing director and head of fixed income, “establishing a participant base of both issuers and investors. But we know the ambition of China for the relevance of the renminbi in international trade goes beyond this.” He notes that Singapore is the finance hub of Southeast Asia. “Singapore has to find its new relevance in helping to expand the engagement arena for issuers,” he says.
But he adds a warning. “Regional competition is beside the point. There is a risk that the major centers in Asia will go their own way, introducing different trading requirements that could hobble unified pan-regional growth in issuance. We should develop the market as a whole. If we work together, the entire pie will grow a lot faster.”