Use of RMB as central bank FX diversifying tool a game changer, says HSBC

By:
Russell J. Dinnage
Published on:

The growing trend of international central bank usage of the RMB as a key component of their currency diversification efforts is changing the market’s perception of the Chinese currency, says an HSBC official.

Gina Tang, HSBC’s head of debt capital markets (DCM) for greater China global capital financing, says RMB is undergoing a shift away from its long-standing reputation as a trade settlement currency and is instead being seen by the FX market as an investment or reserve currency.

"The RMB will shift from trade settlement currency to an investment currency, both by local and global fund managers and even central banks," says Tang, who made the comments during a Euromoney conference event in Hong Kong on Tuesday.

"Seeing international central banks placing a part of their reserves into RMB as a part of diversifying away from other major currencies is a positive sign," says Tang.

China has set up 20 bilateral local currency swap agreements in recent years worth Rmb1.6 trillion with central banks in Asia and globally.

This list includes Argentina, Australia, Iceland, Malaysia, Pakistan, South Korea, Turkey and the United Arab Emirates.

Also, September figures from financial messaging service Swift show RMB usage worldwide grew 15.6% between July and August.

Comparatively, usage of all other world currencies fell by 0.9% on average during the period, Swift says.

The renminbi also increased its global market share of usage among all the world’s currencies in August, growing it from 0.45% in July to 0.53% in August, according to Swift.

Another sign that the RMB is evolving comes from the recent convergence of onshore and offshore rates.

For example, for the longer-dated duration Chinese government bonds, the yield difference varied from 50 basis points to 70bp in April.

The yield difference on the bonds narrowed to between 25bp and 30bp in May, and was seen between 0bp and 10bp in September.

"The recent two rate cuts have pushed down onshore yields and the incentive for issuers to take off the offshore market becomes less and less, especially for unrated credits," Timothy Yip, HSBC associate director of DCM origination and global capital financing, tells EuromoneyFXNews sister publication Asiamoney.

"With the EU situation remaining unresolved, China is under pressure to sustain economic growth [and] there are expectations of the People’s Bank of China to cut rates towards the end of the year."