Chinas renminbi also known as the yuan or the
redback has long been an inflexible currency, its
purpose largely to keep the countrys exports competitive.
But moves are afoot to make the renminbi a more flexible way of
settling cross-border trade, with the ultimate aim of creating
a fully floating, unpegged currency.
After years of prevarication, on August 16, China opened the
doors of its domestic interbank bond market to the central
banks of a select group of nations including Argentina,
Belarus, Indonesia, Iceland and South Korea. Analysts at
Standard Chartered called the move a very important piece
of the puzzle for the development of a significant offshore
renminbi market in Hong Kong.
On September 8, Bank of China began issuing up to Rmb5
billion of bonds in Hong Kong with maturities of two and three
years to retail and institutional investors. Five days later,
Euroclear Bank said it would allow clients to settle
transactions and deposit Eurobonds and Hong Kong securities
denominated in renminbi from September 27.
Then on September 19, Beijing publicly allowed
Malaysias central bank to buy yuan-denominated bonds,
taking the credibility of the renminbi as an international
currency to a new level. Other Asian central banks are also
believed, quietly, to have bought yuan-denominated Chinese
bonds in recent months.
Even foreign-listed corporates have got in on the act.
McDonalds has recently issued yuan-denominated bonds, as
has HSBCs mainland China operations and Hong Kong-listed
Hopewell Highway Infrastructure.
The key questions now are these: how big can the offshore
renminbi market become; and who will benefit. The answer to the
first question is, simply put, enormous.
Philip Lynch, chief executive officer Asia ex-Japan at
Nomura, says: Given the importance of Chinese trade flows
and the increasing liberalization of the RMB, the offshore
renminbi market will over time be as important as the Eurobond
In July 2009 HSBC chief China economist Qu Hongbin predicted
$2 trillion of annual cross-border trade (around half the
mainlands total) could be settled in the yuan by 2012.
That would make the renminbi one of the top three currencies in
Standard Chartered says that comparisons between the
offshore-renminbi (CNH) and Eurodollar markets are inevitable:
We expect significant CNH liquidity growth as a result of
renminbi trade settlement, tourist receipts and other renminbi
flows. The bank reckons that CNH bond issuance could grow
faster, were the rules surrounding the ability to transfer
funds into the mainland further relaxed.
Trade in the CNH has so far been relatively thin. At around $4
billion, the offshore-renminbi market is just 0.1% of the
onshore total of around $2.9 trillion. Daily offshore spot
foreign exchange transactions in the renminbi are meanwhile
around $3050 million, or 0.2%, of the $20 billion onshore
spot market. Moreover, CNH deposits, in the Hong Kong banking
system, make less than one-tenth of one percentage point of
Chinas $10 trillion onshore renminbi deposit base.
Yet this isnt stopping cities and states in and around
China from seeking to establish their own credentials as
offshore centres. Hong Kong is the logical base for a CNH
market, though its mainland twin, Shenzhen, is also trying to
muscle in on the act. The Qianhai region of the city plans to
develop an onshore-offshore financial centre working
hand-in-hand with Hong Kong though it remains unclear
what purpose this would fulfil.
The next step with the renminbi should be the creation of
the so-called mini-QFII a variation on the
qualified foreign institutional investor scheme. This is likely
to be introduced later this year or early next.
The project, originally designed as the
through-train scheme, announced and then scrapped
in spring 2009, should allow Hong Kong residents to convert
Hong Kong dollars into renminbi by acquiring Shanghai and
Shenzhen-listed A shares.
That would provide Hong Kong residents with an
incentive to actually hold renminbi, says Lucy Feng,
regional head of bank research, Asia ex-Japan at Nomura.
We expect more investment opportunities in the renminbi
to appear after that, such as investing in the mainland fixed
income and interbank markets.
For now, China seems content to roll out a series of bold
pilot projects big enough to boost interest in the CNH market.
Beijings new currency-related assertiveness also has a
knock-on benefit: as other countries buy Chinese bonds as
reserve assets, upward pressure on the renminbi is created
helping, if only partially, to mollify US politicians
keen to label China a currency manipulator.
Andy Rothman, chief China strategist at CLSA, believes that
once Beijing becomes more comfortable with global growth
prospects, appreciation in the renminbi versus the US dollar
will return to the 57% annual pace of the 200508
period. Following Chinas September surprise, the redback
finally seems willing to take on the greenback.
In time, dont bet against it winning.