Will China unhitch from dollar, internationalise renminbi?

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By:
David Wigan
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Offshore renminbi market surges; Driven by corporate activity

Offshore renminbi deposits and trade settlements have surged in recent months, raising speculation that China is accelerating moves to loosen its ties to the US dollar and create a new global reserve currency.

Total Chinese currency deposits in Hong Kong were Rmb510 billion ($79 billion) at the end of April, five times the level in mid-2010, according to figures from the Hong Kong Monetary Authority, while cross-border trade settlement totalled Rmb134 billion, 13 times the figure posted last July, and nearly 60% of the monthly total trade settlement.

The figures highlight China’s enthusiasm for turning the renminbi into a bona fide international unit of exchange, says Thomas Poon, head of business planning and strategy at HSBC in Hong Kong.

"We are witnessing the birth of a major international currency, and it’s exciting," Poon says in an interview with EuromoneyFXnews. "This is China’s plan to get away from the US dollar cash trap, and monetary authority figures show that the move is accelerating."

Driving the increase in deposits was a big rise in corporate activity, which accounted for two-thirds of total deposits, compared with one-third late last year. Individual deposits accounted for the remainder, as Hong Kong residents piled in sums up to the daily limit of Rmb20,000.

Corporate deposits include some from asset managers who have bought the renminbi in the interbank FX market, says Poon. No official data is published on the exact amount of purchases, he says, so the proportion is uncertain.

"We cannot know without the full data, but my feeling is that the biggest contribution to corporate deposits comes from cross-border trade settlement," Poon says.

"We are witnessing the birth of a major international currency, and it’s exciting. This is China’s plan to get away from the US dollar cash trap, and monetary authority figures show that the move is accelerating"

Thomas Poon, HSBC

Some 45% of HSBC’s commercial banking customers in China plan to use the renminbi for trade settlement in the next year, according to a survey by the bank, and 33% say they would consider doing so, depending on pricing and services. One barrier to uptake, however, is limited access to the currency among overseas counterparties, the survey shows.

While the internationalization of the Chinese currency has accelerated in recent months, there is still a long road to travel. In the first four months of the year, China’s renminbi-denominated trade with the rest of the world amounted to Rmb510 billion, accounting for just 8% of the total. China’s domestic market totals Rmb71 trillion, 100 times the size of Chinese currency deposits in Hong Kong.

"The amount of China’s renminbi trade with the rest of the world is still comparatively small [compared with dollar trade], so there is a lot of upside," Poon says.

Spot trading of the offshore Chinese currency has grown alongside international business and deposits. Average daily volumes on Icap’s EBS platform have grown by 50% in June, compared with May, and hit a record $92 million on June 17. Deal sizes are also rising, with transactions regularly in the $5 million to $10 million range, and a few topping $20 million, Icap reports.

While the Chinese authorities are keen to move forward on internationalisation, they will do so only on the basis that it does not encourage speculation or arbitrage, Poon says. It must not endanger market stability and should be consistent with the longer-term objective of creating a new reserve currency.

Speculators looking to take advantage of the renminbi’s rise face significant difficulties, Poon says.

"There is a firewall between onshore and offshore, which means that the only way investors can buy the renminbi is offshore in Hong Kong, or by investing in renminbi-denominated share sales or CNH [offshore renminbi] bond issues. It is not easy for them to penetrate the border [as flows are highly regulated]."

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