CHINA’S LOFTY AMBITIONS FOR THE RENMINBI
By Gordon Platt
The Chinese government continues to make strides in internationalizing its currency.
Qu, HSBC: Domestic demand should support 8.5% to 9% growth in the coming quarters
Every long march starts with a single step. China has taken many steps toward the eventual globalization of the renminbi. Full convertibility is around the corner.
Since it was introduced in July 2010, the offshore renminbi market has been the fastest-growing currency market in the world, according to HSBC. “This growth is being driven by China’s desire to internationalize its currency and ultimately create an alternative to the dollar as the world’s reserve currency,” the bank noted in a September report.
Chinese authorities have recently widened the channels for renminbi to flow, not just out of China but, just as importantly, back in again, HSBC says. As it becomes easier to invest offshore renminbi back into the mainland, the growth in cross-border circular flows of renminbi will reinforce organic growth and can also be considered a form of capital account liberalization, it says.
Signs of eventual expansion of the offshore renminbi market beyond Hong Kong—perhaps into Singapore and London—in the coming year suggest that the pace of development will not slow anytime soon, according to HSBC.
FOREIGN TRADING GROWS
UK Chancellor George Osborne said in September that China and Britain are likely to develop an offshore trading hub in London, which is the world’s largest center for foreign exchange trading. After meeting with Chinese vice premier Wang Qishan, who was in London for trade talks, Osborne said: “We discussed the strong private-sector interest in developing the offshore renminbi market in London. We will work together to support the market’s further development.”
In the US, derivatives exchange firm the CME Group was planning to introduce dollar/renminbi futures on October 17, 2011—as this issue of the magazine went to press. “The renminbi has experienced rapid growth in deposit and trading volume and is now being used for business transactions in multiple offshore locations, including Hong Kong, Singapore, South Korea, Australia and other areas around the world,” the CME explained. “Accordingly, a need for capital risk-management tools for the Chinese currency has emerged.”
The CME’s dollar/renminbi futures contracts are offered in standard and E-micro sizes (one-tenth the size of the standard foreign exchange futures) and are quoted in conventional interbank foreign exchange market terms.
The BIS reports that $21 billion in renminbi-linked derivatives was traded each day in 2010, most of which took place off of exchanges.
NEW CHANNELS OPEN
Earlier this year the state-controlled Bank of China introduced trading in renminbi in the US market for the first time. The bank limits the amount of renminbi that can be converted by a US customer to $4,000 a day, but there are no restrictions on the amount that can be converted by businesses. US citizens are now able to open FDIC-guaranteed accounts in the bank by converting their deposits into the Chinese currency.
Saxo Bank, which specializes in online trading and investment, announced in September that its clients are now able to trade the offshore renminbi on its trading platforms. The bank offers streaming prices on ticket sizes up to $3 million and larger trade sizes are available on a request-for-quote (RFQ) basis. Renminbi trade settlement has now been rolled out globally—allowing companies anywhere in the world to settle trade transactions using the Chinese currency.
“The development of the offshore renminbi [cross-currency] market is integral to China’s broader strategic plans to internationalize and turn the renminbi into a viable reserve currency,” says Claus Nielsen, head of trading at Saxo Bank, based in Copenhagen.
McDonald’s and Caterpillar were the first US nonfinancial companies to issue debt priced in renminbi in the Hong Kong market—known as dim sum bonds. Unilever and Volkswagen have also launched offered dim sum bonds, and other companies have announced intentions to do the same.
"The development of the offshore renminbi [cross-currency] market is integral to China’s broader strategic plans to internationalize and turn the renminbi into a viable reserve currency"
– Claus Nielsen, Saxo Bank
Mainland Chinese companies are also expected to issue more yuan-denominated bonds in Hong Kong, following regulatory changes announced by a Chinese State Council vice premier—Li Keqiang—on a visit to the special administrative region in August 2011. Dim sum issues were previously limited to Chinese financial institutions and non-Chinese companies.
The offshore renminbi market was further liberalized with the establishment of a $3.1 billion pilot renminbi foreign direct investment (RFDI) initiative. Hong Kong companies are expected to use the RFDI program to invest in mainland securities using renminbi instead of Hong Kong dollars.
The renminbi was a more popular currency for companies issuing bonds than was the euro in the tumultuous third quarter of this year, according to Dealogic. There were $31 billion of renminbi-denominated corporate bonds issued in the quarter, compared to $26 billion in euro-denominated bonds.
As the Chinese currency becomes more widely used around the world, there will be less need for China to hold US dollar assets. China’s trade could also get a boost. Renminbi-settled trade now accounts for around 8.6% of China’s trade settlement, up from only 1% a year earlier.
ACTIVE CENTRAL BANK MANAGEMENT
The People’s Bank of China (PBOC) has raised interest rates three times since January—pushing the one-year deposit rate to 3.5% and the one-year lending rate to 6.56%. “We believe the tightening cycle is approaching an end; the peak of inflation in July and the slowdown of growth support our call of zero rate hikes for the rest of this year,” says Qu Hongbin, chief economist for Greater China at HSBC in Hong Kong.
The central bank announced in August 2011 that it would manage the renminbi more actively against a basket of currencies, instead of just the dollar, and allow market forces to play a bigger role. The PBOC said the dollar, euro, Japanese yen and South Korean won would dominate the basket. The Singapore dollar, Malaysian ringgit, Russian ruble, Australian dollar, Thai baht and Canadian dollar would be included in lesser amounts, it added.
“As China continues efforts to internationalize its currency, the market is rapidly increasing, not just in size, but also in depth and breadth,” according to HSBC’s report on the market. “The rapid rise of the offshore renminbi has taken the world by surprise,” it noted.
ALTERNATE RESERVE CURRENCY
The world’s second largest economy and biggest exporter, China has big ambitions for its currency. The offshore renminbi is “the world’s most important new currency market,” HSBC says. “We expect [the Chinese] authorities to continue their drive to make the renminbi ultimately a fully convertible, deliverable and international reserve currency alternative over the coming years.”
Despite some market commentary to the contrary, China’s economy remains on course, according to Qu. He says fears of a hard landing for China’s economy are unwarranted. “Still resilient domestic demand is sufficient to support around 8.5% to 9% growth in the coming quarters,” he says. “Investment growth has been stronger than expected so far and will continue to find support from over 100,000 ongoing investment projects, public housing construction and resilient consumer spending.”
Qu says consumer spending will hold up well, thanks to two years of strong wage growth and a labor market that remains tight. “Even as export growth softens further in coming months, China is less dependent on net exports, whose contribution to GDP growth was almost zero in the first half of 2011,” he says.
The pace of internationalization, development and growth of the market will remain very rapid and may continue to outpace market expectations for some time, according to HSBC.