A Chinese fashion statement in London

IFR 2054 11 October to 17 October 2014
6 min read
Asia
Jonathan Rogers

IN THE MIDST of the swirling, poisonous cauldron that is British politics it was somewhat refreshing to see a senior member of the British government presiding over an event that wasn’t all about skulduggery.

I’m referring to Britain’s chancellor, George Osborne, unveiling plans for the British government to issue debt in renminbi.

Twitter was abuzz with Mr Osborne’s gushing about the planned deal, which if it prints, will represent the first government bond denominated in renminbi from anyone other than the Chinese government.

“UK firing starting gun on first sovereign RMB bond. As Europe slows, am determined Britain better linked to fast growing markets like China,” he tweeted last Thursday. Bless. One wonders quite what percentage of his Twitter followers would immediately have understood what RMB refers to, or how many would disparage the dodgy economics that somehow links bond issuance in a currency to a “fast growing market”.

Forget the economics, George and his brethren at the Treasury are more interested in a fashion statement.

At just US$325m-equivalent I doubt very much whether the UK’s renminbi bond will ever demonstrate any meaningful liquidity, and it isn’t going to do much to the country’s finances. They will, however, get prime mover advantage for setting the trend, and it will be used as a benchmark by other sovereign states that will no doubt follow the UK’s lead and bash out some renminbi debt.

The UK is planning a London roadshow for October 13 via Bank of China, HSBC and Standard Chartered and will be hoping to print once that is wrapped up, although nothing is easy in financial markets in Octobers and with volatility picking up it’s by no means certain that an issuance window will open without hazards attached. Good luck to the leads.

The UK’s renminbi bond has put the internationalisation of the renminbi smack bang centre stage

THE KILLER PIECE of information for market historians is that the proceeds will be used to fund Britain’s foreign exchange reserves. That’s rather something, because to date the UK has only held reserves in US dollars, euros, yen and Canadian dollars. It’s a call on the renminbi becoming a reserve currency – or am I reading too much into it?

The UK Treasury said as much in a statement released soon after the deal was announced, even if, frankly speaking, US$325m is an irrelevance when it comes to reserves. It’s about the symbolism, and the Chinese will be smiling from ear to ear about the plan. Undoubtedly any offence David Cameron may have caused by meeting the Dalai Lama a few years back will have been forgiven as the bond cements the UK government’s ambitions for London to become a global centre for renminbi trading in all its forms.

Of course, the idea that just issuing a bond can somehow work magic and create the infrastructure of a fully functioning market is absolute tosh. It’s the PR baloney from issuers and banks that we’ve heard uttered so often before. I somehow doubt that the UK’s first sukuk, issued in June, will usher in a bonanza of sukuk issuance from UK PLC or create a centre for Islamic finance in London, but that was the breathless pitch from all involved at the time.

I reckon those bonds, much like the renminbi bonds – assuming they are issued – will end up on brokers’ special item lists, with much whistling through teeth done when any interested party asks for a firm price.

The UK’s renminbi bond has put the internationalisation of the renminbi smack bang centre stage. Yet, it’s done about as much for the renminbi’s status as an international reserve currency as Sarah Palin did for the US’s trade deficit with China earlier this year, when she advised Americans to eat less Chinese food.

Of course there has been creeping internationalisation of the renminbi for years and global trade is increasingly denominated in the Chinese unit, but the US dollar enjoys its old hegemony with around 60% of global central bank reserves.

THE CHINESE AUTHORITIES crave the global economic clout owning a reserve currency would bring their way, but their biggest fear is the potential a freely traded currency would have to wreak havoc on their carefully controlled economic model. They open up China’s closed capital account at their peril.

HSBC’s economists are of the opinion that the renminbi will become fully convertible over the next two to three years and reckon a clear signal of this will come when the IMF’s Special Drawing Rights basket is up for review next year. It seems likely that the renminbi is something of a shoo-in for inclusion.

In all this, China and its UK partners should be mindful of the last big currency internationalisation story: the yen in the early 1990s, when the bursting of Japan’s bubble economy brought all talk of the yen as a potential premier reserve currency crashing down. While the seemingly miraculous ascent of the Japanese economy in the 1980s had brought this debate into the fore, global institutions lacked the collective will to make it happen.

Is that will there as far as the renminbi is concerned? I have no idea, but I know that Britain under its presiding authorities will play a part in any collective devoted to the project.

Jonathan Rogers