Picking up pace

IFR Asia - Renminbi Capital Markets 2014
11 min read

China is taking steps to open its capital account and internationalise the renminbi, putting it on track to become one of the world’s top international currencies.

The Sun Hung Kai Properties Vertical Run for the Chest race takes competitors up 82 floors at the International Commerce Centre, Hong Kong’s tallest building.

Picking up pace

Source: REUTERS/Tyrone Siu

The Sun Hung Kai Properties Vertical Run for the Chest race takes competitors up 82 floors at the International Commerce Centre, Hong Kong’s tallest building.

China’s efforts to make the renminbi a top international currency are gaining momentum as the world’s second largest economy pushes for a greater role in the global marketplace.

After starting with baby steps a decade ago, regulators have made a range of policy decisions within the last two years to transform how corporations and investors view the renminbi, leaving it poised for a greater role in the global capital markets transactions in the months and years ahead.

The decision in March to expand the trading band for the renminbi to 2% from 1% signalled to the market that the renminbi could go down as well as up. Introducing volatility was a major step to encouraging global corporations to adopt the renminbi as a payment currency, said Ashley Davies, senior economist and strategist at Commerzbank in Singapore.

If exporters or importers were not comfortable with the exchange-rate risk, they might require payment in renminbi, forcing companies outside of China to open offshore renminbi accounts, Davies said.

“That aspect is the single biggest short-term driver of the internationalisation of the renminbi, as corporates will be pushed to open offshore accounts and look for funding in the currency through the offshore capital markets,” he pointed out.

The decision to open up the renminbi exchange rate and further the related capital markets beyond China was made at the highest level – the third plenum of the 18th Central Committee of the Communist Party of China in November 2013.

China’s regulatory efforts to internationalise its currency can be grouped largely into four categories: liberalising the exchange rate, establishing offshore renminbi centres, expanding channels for the redeployment of renminbi funds into China and developing a more efficient payment and settlement infrastructure inside and outside China.

The currency’s internationalisation began in earnest in 2004 when Hong Kong residents first were allowed to hold renminbi deposits in the city. Since then, Chinese authorities – primarily the People’s Bank of China and the State Administration of Foreign Exchange – have launched a multi-pronged strategy to liberalise the currency and ensure that an increasing number of trade flows are denominated in renminbi.

Making great progress

They are making great progress towards that goal. The renminbi ranked seventh among currencies used in global payments at the end of May, up from 13th at the beginning of 2013, according to SWIFT, which facilitates electronic payments between banks.

The currency only accounts for a tiny 1.47% of all global payments, far below the US dollar at 41.63% and the euro at 32.35%. Yet, it is rapidly moving up the charts. It was in 20th place at the end of January 2012 with a 0.25% share, SWIFT said.

At that pace, the renminbi is expected to soar to third place and replace sterling by the end of next year, said Andrew Seaman, manager of the Renminbi Bond Fund at Stratton Street Capital.

“No other currency has seen anything like that sort of growth,” Seaman said.

“It goes in two ways – the Chinese Government wants to expand the usage [of the renminbi], as a result of the economic and trade activities, and foreign countries see this as an opportunity to boost financial services in their own countries.”

The PBoC has been injecting volatility into the foreign-exchange markets since the beginning of this year. After starting to fix the rate lower in mid-January, it widened the trading band to 2% in March. Then, over three days at the beginning of June, the central bank abruptly reversed the currency’s direction, shifting the midpoint to 6.1451 against the US dollar from 6.1708. This was the largest three-day move in the currency since April 2013, HSBC analysts wrote on June 10.

The central bank was looking to discourage one-way currency bets and to signal the renminbi would behave with greater two-way volatility from now on, the HSBC note said. Moving to a market-oriented, albeit still fixed exchange rate would help two-way volatility more than abrupt changes towards a freely floating currency, HSBC said.

Still, Davies at Commerzbank urged regulators to step up the pace on exchange rate and capital account reform.

Stable source of funding

The PBoC was looking forward to a currency that provided a stable long-term source of funding for Chinese corporations, said Julien Martin, Hong Kong-based head of BNP Paribas’s Renminbi Competence Centre.

“At the 2% trading band, the renminbi is still considered having relatively low volatility, which is what the PBoC wants to maintain because providing long-term liquidity and funding in a hugely volatile currency is not possible in the long run,” Martin said.

The second prong of China’s strategy is to develop offshore renminbi centres for forex trading and clearing, not only to widen its use in global trade and financing, but to raise awareness of the renminbi as an international currency.

Renminbi hubs have been popping up all over the globe as financial centres seek to grab a part of what promises to be a growing business. Hong Kong’s status as the first and largest renminbi clearing centre has been followed with the establishment of clearing banks in Macau, Taipei and Singapore. Offshore clearing banks have been either recently promised or established in London, Frankfurt, Paris, Seoul, Luxembourg and Sydney to expand the scope of renminbi trade and investment activity outside China.

“An offshore renminbi centre will help build a lot of expertise in this area, which is quite important, for example, for entities in Europe who don’t yet know how renminbi settlement can facilitate cross-border business,” said Patrick Pang, managing director and head of fixed income and compliance at the Asia Securities

Industry and Financial Markets Association, or Afisma. (See Hub Rivalry page 5)

Encouraging the establishment of offshore deposits and capital markets is incomplete, however, if renminbi funds raised cannot find their way back to China. As the world’s second largest economy, the PRC is relatively underrepresented among global institutional investors, and Chinese investors form a small chunk of investors in global capital markets.

Foreign ownership of China’s domestic capital market is expected to reach 3%–5% at the end of 2014, according to Asifma, up from less than 1% in 2013, although still a small amount. Offshore renminbi assets outstanding total Rmb500bn–Rmb600bn, far less than offshore renminbi deposits of over Rmb1.6trn, according to Martin at BNP Paribas.

As the third prong of its internationalisation drive, the PBoC has increased inbound and outbound investments in China through the renminbi qualified foreign institutional investor, or RQFII, scheme and the qualified domestic institutional investor, or QDII, scheme. Both are aiding the flow of renminbi funds back and forth from China.

Hong Kong’s RQFII quota of Rmb270bn is the largest of all the centres. Quotas have been granted to Singapore (Rmb50bn), London (Rmb80bn) and Taiwan (Rmb100bn) and, recently, went to Frankfurt, Paris and Seoul at Rmb80bn each. This put the total RQFII quota globally at Rmb740bn, according to figures from HSBC and Asifma.


A sound payment and settlement framework is needed for the cross-border flow of renminbi to grow. In the absence of a global clearing system for offshore renminbi, Hong Kong has played a major role in facilitating the flow of funds to and from China.

Today, nearly 90% of global trade settled in renminbi (which now accounts for 25% of China’s US$4.2trn of total trade volumes in 2013) goes through Hong Kong, said Esmond Lee, director for financial infrastructure at the Hong Kong Monetary Authority.

The Hong Kong real-time gross settlement channel is the largest offshore renminbi RTGS system, with another one created in Taiwan and one under development in Singapore. This platform could be scaled up as the volume of renminbi payments globally inevitably rose, Lee said.

Through liquidity netting, where payments between banks are offset against each other, the system is able to create an efficient flow of funds in and out of Hong Kong.

“This is very effective in allowing us to scale up the system in anticipation of greater renminbi flows through Hong Kong, and for banks to achieve a higher turnover with greater amounts of liquidity,” Lee said. “So, with more efficient liquidity management, we are very confident that any increase in the turnover shouldn’t have a problem in the RTGS system.”

The final aim of renminbi internationalisation would be to eliminate the separation of onshore and offshore markets, according to Pang at Asifma. A single global renminbi market, which would be an appropriate end-game for the process, would require a flow of funds between different jurisdictions to be fungible and ultimately to settle onshore in China.

To this end, the PBoC has announced the development of the China International Payment System, or CIPS, which is expected to include multiple time zones and to be able to work with onshore and offshore renminbi payment systems. Asifma called CIPS, the fourth prong of internationalisation, a “game changer” in its RMB Roadmap report, which said the payment system would “re-define the ecosystem of RMB centres”.

When the CIPS will be ready is a big question. Asifma originally expected the scheme to be ready next year, but it was unlikely to be ready before 2016, Reuters reported in July.

The system can effectively reduce the need for the individual clearing banks now being established. Lee at HKMA is optimistic, however. Developments to make the payment systems in China more efficient would complement Hong Kong’s current system, he said.

“Because many of our payments are cross-border with China, if the other side becomes more efficient it means we will have more cross-border payments – and, in so doing, it will actually help in the development of the offshore system,” Lee said.

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Picking up pace