China's renminbi capitalises on growing global recognition

Given the already-rapid take-up of the currency in locations as far apart as Hong Kong, London, Singapore, Taipei, Paris, New York and Sydney, it is hard to believe that it has been barely three years since China allowed companies anywhere in the world to settle their international trade in RMB. In 2010, Beijing embarked upon its ambitious programme to make the RMB an international currency, rivalling the clout of the US dollar and euro, and reflecting its own heft in global trade.

Standard Chartered’s Renminbi Globalisation Index (RGI) shows that the international use of the currency has soared nine-fold since we started tracking it in December 2010. Trade settlement and other international payments have been the biggest drivers of late. Equally impressive growth in the other three RGI parameters – offshore RMB deposits, Dim Sum bonds and RMB certificates of deposit, and offshore RMB (or CNH) FX turnover – round up the index’s broad-based improvements.

As of the fourth quarter for 2012, more than 12 per cent of China’s total trade in goods and services was settled in RMB, up from less than 8 per cent a year before. While this is impressive, it also reveals the tremendous scope for further internationalisation of the currency. According to SWIFT data, the RMB is the world’s 13th most-used international currency, accounting for 0.7 per cent of all global cross-border payments. In comparison, the EUR, USD, British pound (GBP) and Japanese yen (JPY) account for 37, 36, 8.6 and 2.6 per cent of all international payments, respectively. The currencies of Australia, Switzerland, Canada, Singapore, Sweden and Hong Kong complete the top 10 rankings. RMB’s rank in the international pecking order has risen from 20th at the start of 2012 as it overtook the currencies of Turkey, Mexico, New Zealand, Hungary, South Africa, Denmark and Russia in the last year alone.

Reflecting its growing stature, the RMB is being increasingly used by global investors and businesses as a currency for storing wealth and for raising capital. In March, RMB 47 billion (Bt238.17 billion) of so-called Dim Sum bonds and certificates of deposit were issued, the highest level since June 2012. This was followed by another RMB 39 billion of Dim Sum issuance in April. By the end of April, outstanding Dim Sum bonds and deposits totalled around RMB 460 billion, almost 70 per cent of Hong Kong’s RMB deposit base. 

Owing to strong demand for Dim Sum bonds, some foreign issuers, particularly banks, have reduced their all-in borrowing costs in USD terms by issuing in offshore RMB and swapping the proceeds into USD. We expect this trend to continue, as the cost savings are real, and this practice helps issuers to broaden their funding channels and investors to diversify their risk exposure.

The latest RGI reading adds conviction to our view that RMB internationalisation is an irreversible process that will accelerate further in 2013. Although Hong Kong still accounts for about four-fifths of our RGI universe, governments across Asia, Europe, the Americas and Africa want to encourage the development of offshore RMB centres in their financial capitals. They see it as critical to future trade with China, which is expected to emerge as the world’s largest economy by the end of this decade. And they are taking policy measures to facilitate this development. This was confirmed by our corporate survey, which showed strong momentum behind the development of offshore RMB. Respondents in that survey expect to use more and a wider variety of RMB products over the coming months and are pushing for relaxed cross-border remittance rules, simpler documentation requirements and shorter approval times. 

Within Asia, Singapore is in a strong position to capture the structural rise in China-Asean flows – which we see as the catalyst for the next wave of RMB conversion – much like London has benefited as European multinationals have embraced the RMB amid rising euro-area uncertainty. In May, Standard Chartered issued the first ever Dim Sum bond listed, cleared and settled in Singapore – right after the city’s RMB clearing services went live. Singapore’s new RMB clearing capabilities will raise awareness among Asean companies of the benefits of RMB over USD invoicing. Respondents to our survey cited better FX risk management, cost savings and improved access to buyers/suppliers in China as the top drivers of RMB trade settlement.

The Monetary Authority of Singapore has already doubled its swap line to RMB 300 billion in March; we believe this liquidity backstop will complement Singapore’s new RMB clearing capabilities, offering further reassurance to existing and potential RMB users in the region. London is set to sign one of the largest RMB swap arrangements with China soon, the size of which could rival those with Hong Kong and South Korea. Australia is also supporting the RMB by committing to invest 5 per cent of its reserves in China’s sovereign bonds. At the BRICS summit in Durban in March, the South African Reserve Bank agreed with the People’s Bank of China to invest up to RMB 9.3 billion, or about 3 per cent of South Africa’s FX reserves, in China’s interbank bond market. Meanwhile, Hong Kong’s recent removal of regulatory impediments will boost its offshore RMB liquidity. We expect RMB deposits in Hong Kong to increase to around RMB 800 billion by the end of the year. 

Taiwan too is catching up fast, as the use of the RMB for cross-border trade settlement by local business soars. In February, Taipei became the fourth-largest offshore centre for RMB settlement, behind Hong Kong, London and Singapore, up from seventh place in August 2012. RMB payments accounted for 12 per cent of Taiwan’s bilateral trade with mainland China in March 2013. This compares with 6 per cent in August 2012, when Taiwan first allowed such trade to be settled in RMB via offshore banking units (OBU).

We see further upside potential as Taiwan’s regulators take steps to speed up the adoption of the RMB, including through wealth management products. In early April, the Financial Supervisory Commission (FSC) announced the liberalisation of foreign investment rules regulating Taiwan’s life insurance companies. The change will allow more life insurance companies to increase their exposure to RMB-denominated products in order to increase their returns. 

The next leg of the RMB’s international march will possibly be led by international investment flows. Beijing recently expanded its QFII and R-QFII programmes with Hong Kong, reiterating its commitment to encourage two-way capital flows. This complements the recent news that 13 multinational corporations are now allowed to move funds worth up to 30 per cent of their invested capital in China across the border. With these measures, we expect foreign ownership of China’s onshore bonds to rise to 1.5-3.0 per cent by the year-end, and 3-5 per cent by end-2014, from less than 1 per cent currently. 

For Beijing, this has never been a one-sided business, as internationalising a currency involves more than pushing money offshore; rather, the intent is to create a deeper pool of offshore RMB liquidity. The expansion of R-QFII creates more RMB-denominated investible assets offshore. It exemplifies China’s experimentation model for capital account liberalisation: opening new avenues and, over time, granting larger quotas, expanding eligibility thresholds, and widening the accessibility of various onshore markets. Expanding R-QFII eligibility beyond asset-management licence holders in Hong Kong to Taiwan’s financial institutions could be the next natural step in the RMB’s long march overseas. Other global financial centres would be next in line. Are companies and investors ready to capitalise on one of the biggest shifts in the financial markets this century? 

 

_ Kelvin Lau is a senior economist at Standard Chartered Bank in Hong Kong.