Renminbi Internationalisation: Prospects for Future Growth

According to People’s Bank of China (PBOC) chief economist Ma Jun, the volume of RMB trade settlement rose 46% in 2013, and while service trade grew at an even faster rate of 84%. RMB settlement for cross-border overseas development investment (ODI) and foreign direct investment (FDI) also rose rapidly, with usage of RMB for ODI rising 293% in the first six months of 2014 – albeit from a small base – and for FDI up 28%.

China’s foreign trade settled in RMB as a percentage of total foreign trade started at 2.2% in 2010, rose to 11.7% of trade last year and accounts for about 16% of total trade so far in 2014.
On the deposit side, RMB deposits in Hong Kong have grown to nearly RMB 1 trillion (US$163bn) and Taiwan has also seen rapid growth in deposits to close to RMB300bn.

ICBC chairman Jiang Jianqing added that cross-border FDI has risen more than 150% since 2010, to RMB466bn, while the RMB has moved into the top 10 currencies globally for trade settlement as well as foreign exchange (FX) dealings.

Progress and Outlook

Policy developments are increasingly rapid and will likely lead to further rapid increases in RMB usage. Ma said the limits that were in place when trade settlement started a few years ago have been removed, so that RMB trade settlement is open to all firms. China has also allowed other avenues for RMB usage, including investments, project finance and debt financing.

For portfolio investments, there is access to the onshore market for some overseas institutions as well as through the renminbi qualified foreign institutional investor (RQFII) regime in Hong Kong, Taiwan, the UK, and Singapore. Moreover, foreign investors will soon be allowed to invest through Hong Kong into Shanghai. Four major offshore markets have responded by developing a range of products that now includes deposits, bonds, FX, derivatives and stock market investments.

Currency cooperation is expanding as well, and by September the PBOC had signed swap agreements with 25 authorities for a total of approximately 2.7 trillion yuan (CNY).

The fundamental driver for international usage of RMB, Ma said, is the continued growth of the economy. Expansion of FDI and ODI, reserve diversification by foreign central banks, growing demand for RMB assets by offshore investors, individual interest in holding RMB assets and growing demand by third parties – such as foreign companies issuing RMB bonds and using the proceeds in a third country other than China – also drive usage.

Turning to the outlook for further RMB internationalisation, Ma said that more initiatives are underway. Developments in the near term include the launch of the China International Payment System (CIPS), easing of restrictions on overseas investments by individuals, developments in the panda (RMB-denominated) bond market, and greater outward investment and lending in RMB. He expects China to achieve capital account convertibility in the medium term, while in the long-term there will be diversification of the global reserve system.

One implication of these shifts, Ma said, is that the ratio of external circulation of the RMB is likely to rise, and there will be recycling of RMB in offshore markets. Additionally, cross-border lending will likely expand significantly and outward investments by companies and individuals will likely grow rapidly as well.

Imperatives for RMB Centre Growth

Looking at opportunities for RMB centres, the ICBC’s Jiang outlined five actions that he sees as essential for their growth:

• The centres should stick to the principle of servicing the real economy rather than simply moving money, and they should focus on the real economic needs of enterprises for trade and development.
• They should help accelerate innovation in RMB products, including the development of offshore RMB credits, derivatives, debt products, and RMB-denominated commodities trading products. The difference between a city that is simply an offshore RMB trading centre and one that is able to expand usage of RMB for greater business development is product innovation.
• Cities also need to continuously need promote infrastructure-building for the RMB business.
• Banks must understand the policies for RMB internationalisation, which are changing rapidly, and decode those policies.
• Cities need to promote exchanges between RMB clearing centres, as the degree to which different centres complement each other is greater than their competitiveness.

Taking the city state of Singapore as an example of how a centre can grow, Singapore minister of state for trade and industry, Teo Ser Luck, said that RMB for trade financing, settlement and investment was already established and Singapore is taking steps to establish a vibrant capital market. Implementation of the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) next year will create free movement of goods and Chinese companies in Singapore can develop strong regional linkages that jump-start their internationalisation.

The Market’s Future: A Panel Discussion

Moderating a panel discussion following the presentations, ICBC senior advisor Yaseen Anwar asked what makes a currency global. Ma responded that it depends on the size of the economy and the openness of the country’s financial system. He offered as an example the actions by China to increase openness, which include further easing of ODI restrictions, allowing access to the Chinese interbank bond market, and debt management.

Monetary Authority of Singapore (MAS) assistant managing director Leong Sing Chion said the creation of new European RMB centers in Paris, Frankfurt, Luxemburg and London takes RMB internationalisation to a different level altogether and sends a very different signal, as RMB clearing has gone to different time zones. This change in signalling encourages investors to take a fresh look at how to use RMB for investment and portfolio needs. The net result has been transformational change in the RMB landscape.

Leong said he expects different financial centres to have different characteristics. Taiwan experienced strong growth in RMB deposits, for example, due to strong retail interest and close economic ties with China. Another panellist added that Taiwan has benefited from the authorities requiring all commercial banks to open an RMB account, RMB clearing banks being able take deposits without limit, and banks also serving as agents for trade between Taiwan and China. While London does not have the same level of deposits, Leong expects that the UK capital will play a key role because it is the largest FX centre globally. Singapore is likely to have broad-based growth that includes deposits, trade, FX, capital markets and asset management.

Singapore Exchange executive vice president (EVP) Lawrence Wong said capital markets are developing, though there is still a shortage of bonds and a hunger for issuance. He is seeing more companies coming to Singapore and asking whether they can complete a listing in RMB. Having launched RMB futures recently, Singapore is also looking at additional product innovations such as derivatives, hedging for commodities, and commodity funds.

Conclusion

Growth in international RMB usage continues to be rapid, and recent market developments have propelled even faster growth. With the PBOC implementing changes that encourage further growth, coupled with the development of RMB clearing centres in an increasing number of markets, the pace of growth looks set to rise even further.

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