China spreads its RMB wings

Central to the strategy was the development of offshore centres capable of building liquidity and promoting the use of RMB outside of China, because at the time circulation was almost exclusively domestic.

"The RMB is not a global currency - yet."
Daniel Everett, Global Head RMB, Strategy & Execution, ANZ

The RMB is not an international currency - yet. For a restricted currency like the renminbi to become an international currency, it must be held and used by foreign corporates, investors and individuals in their dealings with China. 

Moreover, a true international currency is one which is used by non-residents for transactions with other non-residents. That RMB has some way to travel.

On the eve of the FT-ANZ RMB Growth Strategy Series in London it is an opportune time to consider how these global RMB centres have evolved and what their future might hold. At present there are over 20 offshore RMB clearing hubs which have been appointed by the People’s Bank of China.

The hubs have been strategically placed around the globe to cover all timezones and large geographies. Hubs have typically emerged in countries with strong Chinese trading and investment ties or in large financial centres.

The ultimate view is finance will follow trade and clearing hubs are an important facilitator of those flows. This is certainly true for key centres and partners such as Hong Kong, South Korea, Australia, United Kingdom, Singapore, Taiwan and Europe.

These centres are even more important because China’s currency is not yet fully convertible. Remitting RMB to and from China and converting to and from foreign currencies is restricted.

MORE THAN ONE CURRENCY

Such restrictions were the catalyst for the development of an offshore RMB currency referred to as CNH. CNH circulates solely outside of Chinese borders and isn’t subject the same regulations as onshore renminbi (or CNY).

Offshore RMB centres provide a clearing mechanism to link offshore RMB back to the mainland while also promoting offshore product development and the creation of liquidity pools to facilitate financing and investment for foreigners needing RMB.

Not all hubs are the same however and some have stolen a march on others and differentiated themselves for a variety of reasons.

HONG KONG

Hong Kong, for example, was the world’s first offshore RMB clearing hub which makes logical sense given its linkages with China. Hong operates for all intents and purposes as a standalone offshore centre.

Hong Kong’s historic relationship with China, geographic proximity and advanced financial markets make it perfectly placed to be a significant conduit back to the mainland. Hong Kong has certainly used this advantage and still remains the largest (by some margin) clearing centre globally for RMB outside of China.

Recent statistics published by SWIFT show just how dominant Hong Kong is in terms of RMB payments and receipts.

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LONDON

It comes as some surprise the United Kingdom has overtaken Singapore in second place, though is still way behind Hong Kong. This reflects the growing use of the RMB as a payment currency between the UK and Greater China.

London is also the largest FX trading centre in the world with average daily turnover exceeding $US2.2 trillion (37 per cent market share), according to theBank of England’s Semi-Annual FX Turnover Survey and the Bank for International Settlements Triennial FX Survey, both conducted in April 2016. It is perhaps not surprising to see London moving up the charts with a bullet and this should continue.

SINGAPORE

Despite moving into third place, Singapore remains a key centre as well. As a key location for regional treasury centres, it is also a leading hub for commodity trade being strategically placed in Southeast Asia’s shipping routes.

Singapore also has strong trade and investment flows with China and the third largest RMB deposit base (RMB142 billion) outside of China making it a logical place to build and develop RMB products and services for the offshore market.

Also, as the third largest foreign exchange trading centre behind the United Kingdom and United States, Singapore has a critical role to play in providing offshore RMB liquidity and risk management services to the region.

TAIWAN

As a centre for RMB, Taiwan already boasts a pool of RMB deposits totalling RMB306 billion, a liquidity pool second only to Hong Kong which has RMB712 billion (balances as at the end of June 2016).

Despite a complicated relationship and a yet to be finalised Cross Strait Service Trade Pact, a strong trade and investment relationship has continued to thrive between China and Taiwan.

This relationship has been key to building Taiwan’s RMB presence however for the most part, Taiwan appears more standalone and less connected to the rest of the larger RMB financial centres.

AUSTRALIA

Australia has also tried to take the bull by the horns and promote itself as a key RMB centre in the Asian region. Building a RMB clearing system which plugs directly into China (a unique development for an offshore centre) and developing capability to issue, settle and hold RMB denominated securities has positioned Australia well for RMB to become a larger part of Australia’s relationship with China.

Australia already has strong trade relations with China and been a growing source of inbound direct investment so its development as a RMB clearing hub is no surprise.

A trade relationship dominated by $US priced commodities however, has seen a slow take up in RMB payments and deposits from Australia to date, however this should change given time.

REST OF THE WORLD

Other markets such as South Korea and Canada again rely on strong trade and investment relationships to build their RMB flows and liquidity although to date, these still remain modest.

Interestingly, the Republic of Korea and the Province of British Colombia have both issued sovereign RMB denominated Panda bonds into China’s onshore bond market to demonstrate commitment to their respective countries’ efforts to assist with internationalising the yuan.

Strong public and private sector support in both of these countries remains vital to growing their share of the RMB pie.

Perhaps the most interesting development has been the recent inclusion of the United States as an offshore RMB clearing centre and the formation of The Working Group on US RMB Trading and Clearing.

The United States was previously conspicuous by its absence (though not surprisingly so) but it has now certainly emerged with a bang, receiving the second largest RQFII allocation from the PBoC of all countries (RMB250 billion) behind Hong Kong (RMB270 billion).

As a global financial behemoth and home to a significant number of investors and multi-national corporates, the United States should have a key role to play in the development of the RMB. To date, RMB internationalisation has not been a high priority for the United States given the rarefied position that the $US enjoys as the world’s completely dominant reserve, investment and trade currency.

This stance appears to be softening and the United States will be very important to RMB development not just for North America, but for the rest of the world as well.

GREATER CONVERTIBILITY

While China has given great focus to building offshore centres, it has also pressed forward with measures to make the yuan more convertible and has also built cross-border RMB payment infrastructure (Cross-border Interbank Payment System, or CIPS).

Such developments are clearly aimed at making it easier and more efficient for foreigners to deal directly with China rather than needing to be intermediated through an offshore hub. While these developments are no doubt critical they will potentially see over time the importance of offshore centres diminish.

How each centre evolves as China becomes more liberal and direct access becomes the norm will depend on what each centre brings to the table. London and New York are likely to remain the world’s key foreign exchange trading centres so will be a natural magnet for RMB trading.

Other centres will need to work out how they will best fit in as China’s new world order continues to emerge.

Daniel Everett is Global Head of RMB, Strategy & Execution at ANZ