The hype of becoming an offshore renminbi hub – or a centre for trade, settlement and financial instruments for China’s burgeoning offshore currency – reached new heights last month when London moved closer to becoming a bona fide trading centre of the currency. It is not the only one. Singapore has declared its ambitions to become such a centre, and Taipei would like to gain more offshore renminbi capabilities too. The interest of such cities begs a question: why is New York, as the world’s pre-eminent financial centre, still on the sidelines?
The answer, it seems, is that the US won’t welcome an onshore renminbi hub – or at least not the sort that Beijing is interested in.
The requirements of New York to become an offshore renminbi hub can be gleaned by looking at what London has done. The UK capital has lobbied for renminbi rights since before September 2011, at which time Chinese vice-premier Wang Qishan visited the UK, and the country’s regulators and politicians first aired their plan to transform the city into a main renminbi trade centre.
Such ambitions were reinforced in January when British chancellor of the exchequer George Osborne said that London would launch a forum with the Hong Kong Monetary Authority(HKMA) to bolster renminbi-denominated business.
Amid these developments, prime minister David Cameron is said to have been studying the renminbi to gain a better understanding of how the currency behaves, and has helped to pave the path for the UK to be the only European country to enter into such “a high-level economic dialogue with China”, the government revealed in January.
Rhetoric, it seems, is key. Last month, after HSBC issued its maiden London-listed bond, Osborne used a Chinese proverb that London’s progress of becoming a true hub “starts as a small acorn but I hope it will turn into a large oak tree”.
Beijing itself is big into pomp. On April 18, the day that HSBC issued its three-year, Rmb2 billion ($317.2 million) London-listed bond issue, the People’s Bank of China (PBoC) issued a statement on its website under a large red banner, heralding the success of the renminbi’s use in a new market—the first time dealers recall the PBoC putting such emphasis on a bond deal.
The UK’s approach has been respectful, deferential or obsequious, depending on your viewpoint. But such buttering up seems to work wonders with Chinese officials, and it tallies well with their desire to internationalize their currency.
However, doling out such praise to China just isn’t the American way – at least not now. While UK officials soft-talk the potential of an international renminbi, US politicians have been berating China for low-balling their currency’s exchange rate to score some quick political points.
In January, US treasury secretary Tim Geithner used the World Economic Forum to reiterate his view that China is intentionally keeping the renminbi undervalued.
Meanwhile, presumptive Republican presidential candidate Mitt Romney declared several times during his party’s presidential candidate debates that he would brand China a currency manipulator on his very first day in office if elected – although Romney has since softened this position, stating that he will only do so if the country is still deemed to be manipulating its currency upon his entrance to the Oval Office.
Amid such bellicose talk, the US has not rolled out any initiative to welcome the renminbi into its financial regime. Market-savvy New York bankers might see the value in boosting the renminbi’s usage and trade, but there is little chance this will materialize, given the rhetoric swirling around the forthcoming presidential elections.
An ideal also-ran
It is a shame because New York would make an excellent renminbi hub, for four main reasons.
First, the city is arguably the most sophisticated financial market on earth, boasting access to all the necessary trading facilities, investors and dealers that could propel the renminbi into a more widely used and mature currency.
Second, the US is China’s largest export nation, comprising $324.5 billion-worth of goods in 2011, according to China’s National Bureau of Statistics. This figure is second only to the whole of the European Union.
If American importers had more incentive to settle their bills in renminbi, then this would appease China’s goals to popularize the renminbi. The favour might also be returned, as Chinese exporters often give importers who settle in renminbi a discount on their payments.
Thirdly, Latin America is becoming a prominent business partner for China. New York lies in a much more convenient time zone for South American countries than Hong Kong or London, which would mean that the city could benefit from helping handle renminbi-denominated business.
Lastly, China itself wants to elevate the renminbi’s status to that of an international reserve currency, much like the dollar. That means it will need 24-hour renminbi trading centres. With New York’s trading experience, the city has some negotiation clout: if London and all its financial splendour make a good renminbi trade partner, New York can offer the same.
All these factors mean New York could easily generate renminbi deposits and promote more business for banks that have clearing arrangements with other global centres, were it so inclined.
China’s leaders want the best for the offshore renminbi and are prepared to award the centres that can do the most for the currency’s development. The lesson for New York might be to play along. It will have to eventually, after all.
Even in its overly controlled form, the renminbi is going to be a key global trade currency and it will become more prominent as China continues to liberalize its onshore market. One way to encourage more renminbi into the city would be to allow more onshore banks to set up branches in New York, as well as encouraging key bank executives and market regulators to learn more about the renminbi’s trading infrastructure.
The financial relationship between the US and China is complicated but it is deep, widespread and improving. China has made concessions to open its market to foreign investment and has widened the trading band for its currency, which should appease US financial regulators to some extent.
Instead of burying their heads in the sand, New York’s financial regulators and market practitioners should do all they can to make renminbi-denominated business as accessible to investors as possible.
That means pointing out to recalcitrant politicos of Washington DC that the internationalization of the renminbi is inevitable, and it would be safer for the US’s financial future if New York were to lead such efforts rather than stumble along in the trail of more eager rivals.