FX comment: Everything you always wanted to know about RMB but were afraid to ask

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By:
Trevor Carr
Published on:
October’s Euromoney magazine carries an article by Chris Wright surveying the liberalization of the renminbi market. It should be read in its entirety. Subscribers will get their hard copy soon, or they can read it online here. Here’s a précis for those of you who are truly time-pressed.

The pace of RMB liberalization is increasing: in January 2009 there was the CNY200 billion currency swap between the PBOC (People’s Bank of China) and the HKMA (Hong Kong Monetary Authority); and in June 2009 the pilot scheme was launched for the settlement of cross-border trade in renminbi.

In February this year new rules from the HKMA allowed further development of offshore renminbi business by participating banks – one effect was to open the renminbi bond market to eligible issuers in Hong Kong.

Then, on July 19, the HKMA and PBOC signed the Supplementary Memorandum of Cooperation. This increased the pool of renminbi holders to include non-bank financial institutions, allowing them to “open renminbi accounts and receive non-trade-related renminbi conversion. Also, restrictions were removed on transfers between Hong Kong-based renminbi deposits”, meaning that Hong Kong banks could net out positions with each other. This in turn means the beginning of true offshore trading within Hong Kong.

On August 16 the PBOC allowed investment in the onshore bond market, subject to a quota, by foreign central banks, renminbi clearers in Hong Kong and foreign banks participating in cross-border trade settlement.

These measures have resulted in the emergence of an offshore deliverable market in spot and forward USD/CNY that can only grow further and encourage the development of other offshore markets such as “money market, bonds, structured investment products and mutual funds.”
 
The new measures also make it more likely that renminbi payment will become accepted in corporate trade now that there are investment products for those funds and ordinary companies are permitted to invest in them. Participants expect more trade volume will be remitted in renminbi rather than USD.

Figures from Standard Chartered research at the end of August reported: $12.5 billion equivalent in renminbi deposits in Hong Kong, compared with $10 trillion onshore in China; $30 billion to $50 billion of spot transactions per day offshore (this number itself is said to have increased rapidly since the report and now that Hong Kong-cleared CNY – technically CNH – spot trading is available on Reuters and EBS), compared with $20 billion onshore; and $4 billion equivalent in offshore bonds, compared with $2.9 trillion onshore. The gulf between the off- and on-shore figures could mean that a tide swell in Hong Kong flow is imminent.

There are still constraints and impediments to growth of course. And full convertibility of the renminbi is not only a matter of FX or export considerations; there are fundamental questions of cost and wage pressure within China, the pressure on margins and the sustainability of the domestic economy.