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| Mark Boleat, chairman of the City of London’s policy and resources committee |
Mark Boleat, chairman of the City of London’s policy and resources committee, is a picture of relaxation as he walks into a meeting room next to his office at the Guildhall. With tie loose at the collar, he explains the leading role he thinks London can play in the development of the offshore renminbi bond market. Alongside his day job, Boleat serves as chairman of the steering committee for the City of London initiative on London as a centre for RMB business. Set up in April, the committee’s aim is to encourage London’s long-term position as the primary western hub for renminbi transactions, while also boosting the currency’s international use in trade and investment.
In a move straight from public relations 101, on the very day the committee was set up HSBC issued the first offshore renminbi bond in London. It raised Rmb2 billion ($317 million), with 60% being placed in Europe. The landmark issuance attracted demand for more than Rmb4.25 billion, highlighting Europe’s appetite for dim sum bonds.
The original committee was made up of Bank of China, Barclays, Deutsche Bank, HSBC, Standard Chartered, JPMorgan and Royal Bank of Scotland, in association with the UK Treasury, the Bank of England and the Financial Services Authority. These have since been joined by China Construction Bank (CCB), Citi and Industrial and Commercial Bank of China (ICBC). The presence of large Chinese state-owned banks is noteworthy, fuelling confidence among bankers and investors that London could be the real deal as far as offshore renminbi issuance is concerned.
Boleat highlights CCB’s latest dim sum bond out of London as an important step forward. The Rmb1 billion, three-year bond launched out of CCB’s London outlet on November 30 with a yield of 3.3%. It is the first dim sum bond issued out of the city by any Chinese-based institution.
Boleat suggests that other international banks will inevitably follow in HSBC’s and CCB’s footsteps: “It would be safe to say that international banks such as Citi, RBS and Standard Chartered would look to issue dim sum bonds out of London to build liquidity in the market and facilitate their business in Asia,” he says. “I expect many more to dip their toes in the water.”
Amid distractions such as the eurozone crisis, the US fiscal cliff and even a slowdown in domestic economic growth, China’s economy has remained relatively robust, easily maintaining its position as the second largest in the world.
Angus Hui, fund manager, Asian fixed income, at Schroders in Hong Kong, says that China’s strong economic fundamentals bode well for the growth of the currency. China’s government debt and fiscal balance as a share of GDP are low. And although China’s growth rate is lower than the heady levels it has achieved in the past, the economy is set to benefit in the long term from a more sustainable growth pattern. “The currency should also gain support as the government rebalances the economy away from investment towards consumption,” he says. “Investors will naturally be looking to increase their allocation into the renminbi market.”
The country’s generally sound economic performance has thus far not been mirrored by international use of the renminbi. A report by the IMF notes that in 2011 China accounted for 10% of global trade, up from 4% in the previous decade. But only 8% of China’s total trade in goods and services was settled in renminbi.
The sheer size of China’s economy and its growing share of global output mean it is probably only a matter of time before the renminbi begins to play a greater role in international finance and trade.
Granted, much will depend on the actions of the new leaders of the country’s Communist party but figures suggest progress has already been made.
In a recent HSBC survey, 77% of those interviewed believed that by 2015 a third of all trade with China would be finalized in renminbi – a big increase from current levels. “So although trade settlement volumes as a percentage of total world trade aren’t very high at the moment, we see this as having room to grow. This is a reason for optimism more than anything else,” says Robert Koller, financial markets partner at London-based law firm Simmons & Simmons.
The same HSBC survey also discovered that companies with a strong foothold in China already recognized the value of using the renminbi for transactions. Just over half of respondents based in China said they would consider offering a discount to their trading partners for using the currency. More than 40% of respondents were prepared to offer a 3% discount, with some surveyed even willing to offer discounts of 7% or more. “Tesco has already begun exploring renminbi invoicing with suppliers and is seeing financial benefits as suppliers offer better prices,” says Greg Clark, MP, financial secretary to the UK Treasury.
“The thing is, if it is easier and much more straightforward for commercial organizations in Europe to invoice or to pay in renminbi in a way that saves them a lot of money, this would be a huge success,” says Boleat. “But unfortunately, this isn’t what gets publicity. Something like a CCB bond issue in London, however, gets media coverage.”
Other banks are taking a slightly different approach. Last May, Standard Chartered issued Rmb1 billion in euro-commercial paper (ECP) that, according to the bank, bridges the gap between dim sum bonds and traditional deposits for investors. The issuance created a new instrument and market for investors from Europe as well as Asia to access short-term renminbi-denominated securities that also offered attractive yields.
“[Through the issue], we were able to bring some liquidity into Standard Chartered in London,” says Adam Tyrrell, head of capital markets, Europe, at Standard Chartered. “In turn, this will help trade finance and currency flows in and out of China, and bring more liquidity into London.”
Before November’s regime change, the Chinese government had been actively pushing the internationalization agenda. A number of measures have been introduced aimed at opening up China’s economy. Most notably, Beijing extended its qualified foreign institutional investor (QFII) limit to $80 billion from $30 billion in April last year. A record $2.8 billion was issued to foreign investors in October last year alone. There is even talk that the quota might be further increased to around the $200 billion mark in the near future.
Opening up the Chinese economy is necessary, especially if China is to fulfil its stated ambition for Shanghai to become an international finance centre alongside Beijing by 2020.
HSBC has said it expects the renminbi to be fully convertible by 2018. But many obstacles to this remain. “China discriminates against foreign institutions, but even still, when I go over there, people ask me what China needs to do to develop international finance centres there – not just in Shanghai, but in Beijing as well,” says Boleat. “And the obvious answer is that you need to be seen as international and you need to stop discriminating against foreign institutions. But they would rather do everything else before this becomes a viable option.”
Despite such obstacles and the need to change attitudes in some quarters, hopes are high that the new Chinese government will continue on a progressive track.
Boleat says: “The recent flurry of policy changes in China is encouraging because it indicates that perhaps the policy of internationalization is embedded into decision-making and not something that will stop because of new leadership. Clearly then, there is a long-term agenda to internationalize the Chinese financial system, to see the internationalization of the currency, free interest rates – the whole lot. But the real question is the speed at which this is all going to happen and the extent to which the authorities can manage it. These questions are never really easy to answer because China wants to manage liberalization, which by its nature can’t be managed. It’s a contradiction.”
He adds that the need to retain control is easily explained. “Once you liberalize, the economy will take its own course. Beijing knows this. And for this reason, Beijing is particularly cautious.”
London has also created some of its own obstacles. At the second London-Hong Kong International RMB Forum, held at HM Treasury in December, Chinese commentators expressed the need for the Bank of England to set up a swap line with its Chinese counterpart. According to Xia Bin, director-general of the Finance Institute of the State Council Development Research Centre in China, who spoke at a seminar after the meeting, a swap line would build investor confidence and promote the internationalization of the RMB.
For now, a swap line is off the agenda: “The Bank of England will only do a swap if it is necessary and will not do so just to make a statement,” replied Boleat.
Moreover, with UK capital and liquidity surcharges above the Basle III minimum, Chinese banks hoping to expand in the City could also be “discouraged from doing so as a result of additional funding and capital costs,” said Jesse Wang, executive vice-president of China Investment Corporation, at the seminar.
Discouragement for Chinese banks has stemmed from regulations introduced last October by the Financial Services Authority to limit the number of foreign bank branches that can be opened in the City. In response to the policy, a letter was sent to the UK Treasury by the Association of Foreign Banks on behalf of the Chinese institutions, complaining about onerous liquidity requirements and other regulations in the UK.
Boleat replied: “Policies we have towards banks in the City of London are towards all foreign banks, not just Chinese banks.”
The progression of the renminbi into an international currency will happen in three stages, according to Paul Gooding, head of European renminbi business development at HSBC in London: “First, the development of trade flows between China and elsewhere; secondly through investment channels and the offshore market; and thirdly when the renminbi becomes a reserve currency.”
And London’s growing presence in the offshore market is pivotal to Chinese economic policy. “Basically, the whole point of this is for the internationalization of the renminbi,” says Gooding. “China needs to push its currency out into the wider world – and London is getting in early.”
While London chases the goal of becoming the western gateway for offshore renminbi transactions, doubts remain in some quarters about what London brings to the table where the development of the market is concerned.
“There is no real material benefit to banks and corporates that wish to issue in London over Hong Kong,” says one commentator. “They might want to target European investors through London, but don’t forget that issuing in London will not exclude Asian investors from tapping the market there either.
“London doesn’t have the natural trade flows that Hong Kong has and, to be honest, it’s difficult to tell whether or not issuing bonds in London will make much of a difference in terms of London becoming a viable alternative to issuing dim sum to Hong Kong.”
Hong Kong has a clear competitive advantage because trade flows naturally into it. As of April last year, total renminbi deposits in London were about Rmb109 billion, according to a survey conducted by Bourse Consult in association with the City of London. This pales in comparison with Hong Kong, which holds Rmb589 billion in customer deposits alone. The survey also estimated that the amount of CNH (offshore renminbi) traded in Hong Kong is $1.5 billion a day – more than half of the total traded on all other FX platforms globally.
Hong Kong will undoubtedly maintain its position as the premier renminbi settlement centre, reflecting its close economic ties with the mainland. There are also plans for Taiwan to become another offshore renminbi settlement centre. For London, becoming a settlement centre is not on the agenda. Without that, can London truly compete with Hong Kong or even Taiwan?
The answer is that London will not be in direct competition with Hong Kong or Taiwan, or any other finance centre for that matter. It is much more likely that each finance centre will eventually fall into separate but complementary roles when it comes to the offshore market. Hong Kong will remain China’s closest economic collaborator and testing ground; the offshore market in Taiwan will grow to facilitate trade between the mainland and the island; and, through London, issuers will hope to tap the European investor base.
The UK Treasury and the Hong Kong Monetary Authority already have channels of cooperation open. The London-Hong Kong International RMB Forum was launched by Chancellor of the Exchequer George Osborne and the chief executive of the HKMA, Norman Chan, in January last year. Clark says: “At the first meeting in May, the forum set out a programme of work to establish a common platform for international renminbi business across our two financial centres – including supporting companies wishing to denominate trade in renminbi; smoothing renminbi liquidity between Hong Kong and London; and working to increase the range of direct quotes between renminbi and other currencies – including euro and sterling.” Hong Kong is the global clearing centre for offshore renminbi, but the HKMA lengthened trading in June by five hours to overlap with trading hours in London.
The internationalization of RMB lends itself to cooperation. Standard Chartered’s Tyrrell says: “Offshore renminbi is global. It’s not targeted on a specific region. Historically, Hong Kong had the largest pool of liquidity, but now there are pools of liquidity elsewhere.”
Boleat is confident that the offshore renminbi market in London will take off. And if China’s goal is to see the currency become fully convertible and eventually a reserve currency, which he is sure it is, the offshore renminbi bond market will have to gain some ground in London.
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| Pietro Poletto, head of fixed-income markets at the London Stock Exchange Group |
London enjoys several natural advantages of its own. It shares its market hours with the rest of Europe and with Africa, as well as portions of the day with Asia and the US; English is the language of business and London is Europe’s largest transport hub, explains Pietro Poletto, head of fixed-income markets at the London Stock Exchange Group. But more than this, London and its stock exchange have the expertise and the infrastructure to pull it off. According to data from the Society for Worldwide Interbank Financial Telecommunication (Swift), London has surpassed Singapore to become the second-largest centre for offshore renminbi payments, behind Hong Kong. For the period July to September 2012, the UK accounted for a 28% share of the market, up from 25% in January. Singapore’s share declined from 34% in January to 26% in the third quarter. The City of London also estimates that London is the largest offshore renminbi spot FX trading centre outside of Hong Kong, accounting for 26% of the market.
London is the natural gateway for the offshore renminbi market in Europe, says the LSE’s Poletto: “The city is already well established as a hub for international finance and it’s unrivalled in areas such as emerging markets, Islamic finance and foreign exchange. London is a natural fit for renminbi-denominated instruments as the currency starts to internationalize and gain traction outside of mainland China and Hong Kong.”
London can offer the dim sum market increased visibility on a global stage, as well as geographic diversification in the investor and issuer bases. As the offshore market grows, issuing in London will be important: it will give investors exposure to credits that might not necessarily have been on their radar. Indeed, European investors are looking to diversify away from dollars and euros, says Schroders’ Hui, and at the same time they are able to achieve a better yield in the offshore renminbi market.
But this cannot happen in isolation. It will be in the best interests of issuers, especially lesser-known Chinese names, to conduct roadshows in Europe. Bond issuance not only raises funding but also an issuer’s profile. London is the prime place to access a European investor base and raise awareness among these investors. HSBC’s Gooding says: “At the moment, education for corporates and investors is key to the development of the market. And as the education process increases, we hope the global liquidity pools will also grow and eventually so will the bond market.”
Initially, investors will remain cautious. As Hui points out, European investors are most likely to focus on blue-chip corporates and big international banks with solid fundamentals when it comes to dim sum bonds. Large Chinese banks, including CCB, but also Agricultural Bank of China and ICBC, which have a growing presence in London, will look to issue dim sum out of the city. “But as the market develops, we will hopefully see a mix of different quality companies coming to the London market to feed investor appetite.”
International heavyweights, such as Volkswagen, Volvo, Caterpillar and Emirates, have recently issued renminbi-denominated debt, albeit outside London, but this has given the offshore market a confidence boost. “The market has come a long way in a short space of time and will continue to grow given the currency’s increasingly global role,” says Hui.
At the second London-Hong Kong Forum, more than 60 international companies were represented, including Aston Martin, Tesco, BP and GlaxoSmithKline, to explore the opportunities to use the renminbi for trade, funding and hedging.
At a recent dinner he hosted at Mansion House for the chairman of China Construction Bank, Boleat says the deep interest in the offshore renminbi market was clear: “We had the head of the civil service, the chairman of Barclays, the chairman of Lloyds TSB, the chairman of the LSE, even Lord Heseltine. I was probably the last person to be invited! Everyone wanted to be there, you see, because everyone wants a piece of China.”
