• The volume of renminbi payments and investment in products linked to the currency is growing fast
• But it is from a relatively low base: only 0.76% of total global payments
• Slow progress in the development of China’s capital markets is a hindrance to the renminbi’s internationalization
• Confidence is increasing in renminbi stability and in the consistency of the Chinese authorities’ approach to the currency
• Non-Chinese corporates are finding multifarious uses for funds raised in renminbis
JF, HSBC The volume of payments made globally in renminbi is on the increase. On the execution side of deals, it’s incredible to see the diversity of issuers that are looking to tap into the pool of liquidity that is being held offshore, not just as a way of diversifying their funding requirements, but of taking the view that this currency will become more integral to the global economy in the years ahead. We also continue to see new clients buying renminbi bonds, often because they have set up funds that do just that. We are also seeing central banks participating in deals, and that means they are allocating some of their reserves to the renminbi. That has been the case for a long time, but in the past few months, more and more ‘new’ central banks have come into deals and the size of their participation continues to grow as well.
DDW, Swift Payment growth has been very robust in renminbis, so clearly there is a big interest in the currency around the world. But let’s put things in perspective: the renminbi still accounts for only 0.76% of total global payments. You have the renminbi coming up against the most used world currencies, such as the euro and the dollar. Yet despite this, over the past year, the renminbi has been able to leapfrog such currencies as the Russian rouble, and it is now even more widely used than the Thai baht, which is a semi-convertible currency. So growth has been good and there is business potential. One thing to keep in mind is that when you are looking at payments, you are looking at an aggregate, so you have to ask what is driving the use of the currency in payments. Here, it’s notable that 95% of these payments are intra-institutional, flowing between the sell side and the buy side. The other 5% is driven by corporates through trade-based import and export flows. And when I go on the conference trail and talk to officials from the People’s Bank of China [PBoC], that is really what they are interested in, as it’s the part that they feel really contributes to China’s economy. And the renminbi continues to grow in usage – it’s growing in terms of its use in global trade flows by between 50% and 80% a year, so pretty soon it’s going to bump through the 1% mark.
WC, Citic The Chinese authorities talk a lot about the development of the renminbi in real economic terms, so they tend to focus very heavily on the trade-settlement use of the currency. As a commercial bank, we need to know how to help corporates make best use of the renminbi as a means of payment; for that to happen we need to have a deep and liquid market for the currency. Over the past two years, since the CNH [the offshore renminbi] was first rolled out in Hong Kong, the depth of the foreign exchange market has increased substantially. A realistic current assessment of spot daily foreign exchange volumes would be around $5 billion to $8 billion, and if you include forward transactions that figure would be even larger. Another point is that in Hong Kong we might soon start to see interest-rate fixing for the CNH market. This would be a big development, as it would facilitate greater use of the CNH. Once we have a fixing market in place, we can start to develop renminbi-linked derivative products – interest rates swaps, cross-currency swaps and so on. That would be a noteworthy milestone in creating a truly international Chinese currency.
CM, BOCI We have experienced a rapid expansion of the renminbi market in recent years. Total outstanding dim sum bonds [renminbi-denominated debt issued in Hong Kong] hit Rmb405 billion by January 2013, a near-five-fold increase in just two years. Demand for other products has also mushroomed, including deposits and certificates of deposit: demand for both has swollen by several times a year over the past two years. But despite this I believe the renminbi has a very long way to go before we can consider it an international currency. I’d say there are three conditions that need to be met for any currency to be considered truly international. First, that nation’s economic scale: China, currently the world’s second-largest economy, has already met this condition. Second, general confidence in the currency: with the renminbi continuing to appreciate against the dollar, that box has also been ticked. Third, the development of China’s capital markets. Now, here, unfortunately, China has a very long way to go before we see real progress. Although we have already seen some achievement on the interest rate liberalization, the PBoC still controls the deposit and lending rates – onshore, and even offshore, the pricing of renminbi products offshore retains a link to the level of domestic interest rates. Regarding interest rate liberalization, I don’t think that it is an issue that could be really tackled in the near term because the solution depends on the [development] of the capital markets. The good news here is that the internationalization of the currency and the development of a deep, liquid offshore renminbi market can actually push China to make further reforms within its own domestic financial system, which will in turn speed up the renminbi’s adoption globally. We are glad to see that the new generation of Chinese leaders is trying to speed up financial reforms.
Euromoney Turning to the issue of confidence. Does the wider investor community now believe in the future of the renminbi; that China’s currency is here to stay on the world stage?
SW, BOCI Confidence is key to the currency’s future. To be truly accepted by global markets and by international investors, you need to have confidence; you have to be able to trust that the money you’re holding, or the investment you are making, is somehow safeguarded and backstopped. That has less to do with financial market reform and more to do with building a legal framework that offers international investors the confidence to buy, sell and trade renminbi. People talk a lot about needing more renminbi products or services, but further down the line people will be asking other questions, notably: is my renminbi investment protected by the Chinese government? This issue of feeling safe is a far bigger long-term topic than how many renminbi products exist out there.
DDW, Swift We need to make a distinction between convertibility and internationalization. If a currency is convertible, it doesn’t necessarily mean that it’s truly international. Look back at the recent history of the Japanese yen. Japan was another Asian economy that came out of nowhere. By the mid-1980s, the Japanese authorities had decided to make the yen fully convertible and internationalize the currency. When we look at our internal Swift data from the 1990s, we see that, even at its peak, the yen accounted for only 9% of all international payments. Today, that share has been whittled down to 2.5%, yet this is a fully convertible currency powered by a seemingly strong trade-driven and export-driven economy. So we need to be very careful and ask ourselves what China can learn from Japan’s experience and analyse what went wrong with the yen. Examples here might include the lack of an open economy: Japan, even at its height, had an economy overseen by a lot of shadowy rules and protectionist bureaucrats.
CM, BOCI That issue is very valid. It is unimaginable that a currency can be internationalized when it is still not fully convertible. On the other hand, there is a big difference between convertibility and internationalization. Most currencies around the world are convertible in some way, but very few are fully international. The yen never became that widely used as a global currency and Germany’s Deutschmark, even at its apogee, accounted for only one-fifth of processed global trade. No one, over the past 70 years, has seriously challenged the US dollar, which continues to dominate as the world’s reserve currency. The main reason for the decline of the yen was a simple issue of confidence. Just as the yen started to go global, the Japanese economy started to fray, leading to a slump that has lasted decades. This provides a lesson of paramount importance to the Chinese people as, at this point in time, China’s economic situation is far less robust than it was a few years ago. We need to be careful and ensure that everyone – global investors, foreign governments and the Chinese people – retain the confidence that is now embedded in the renminbi. Another challenge is to get the renminbi more widely accepted around the world. A few years ago the Chinese government proposed using the renminbi as a tradable currency when China imported oil, but this failed: the dollar remains the default currency for buying and selling oil. And currently the renminbi accounts for only 11% of all trade settlements. That figure alone suggests that China has a long way to go before it can be said to have a truly international currency.
Euromoney Let’s move on to how corporates are actively using the renminbi in their day-to-day operations. We’ve seen a good flow of offshore renminbi bond sales, by corporates from the Americas, Europe and Asia. But what do these companies do with the money they raise? Do they siphon it into capital expenditure, transfer it back into their own currencies, or do something else entirely?
SW, BOCI One area in which we have been seeing increasing demand for renminbis in the financial industry is in investment. The renminbi is a completely new asset class, one that has never before been available to international investors. Yet within a few years, we have seen the number of available investment products explode: you can now invest in renminbi commodity funds and renminbi ETFs [exchange-traded funds]. It seems that every bank is willing to create a new renminbi financial instrument tailored to investors’ needs.
DDW, Swift Corporates are starting to use the currency to finance trade flows. There are several factors at play here. First, financing costs in the renminbi continue to fall. Second, we come back to the whole trust issue: western corporates and investors have more confidence than ever in the renminbi. And third, there is the creeping process of renminbi appreciation. Chinese exporters see the currency gaining in strength against the dollar or the euro, and they also see that holding those currencies would eat into their profit margins. So a lot of Chinese exporters are offering a generous discount to foreign importers willing to settle in renminbis – typically a discount of 3%. And this has led to more letters of credit being labelled in renminbis. Look at the data: LC issuance globally is flat or growing just shy of 1% a year. But LC issuance is booming in Asia, where inter-regional trade between China and other Asian countries is growing by around 10% a year. And given that China is the linchpin of inter-regional trade, this would explain why the renminbi is increasingly used in trade financing, which in turn is helping support the real economy. The dollar remains the dominant currency in terms of LCs, making up 80% of the market, but China’s share is at 8% and growing fast. Moreover, use of renminbi-denominated LCs ballooned 250% in 2012, with volumes up 500%, which also shows that average ticket size is also expanding. This growth has come largely at the expense of the euro and sterling, and even Asian currencies such as the Korean won; most LC-based trade between China and Korea is now completed in renminbis.
CH, HSBC We did a survey among all our Chinese customers, asking if they would be willing to accept renminbi in cross-border trade with overseas corporate counterparts. Majority of the respondents were optimistic that RMB would account for one third of China’s cross-border trade by 2015. 41% of all respondents told us they’d be willing to offer a discount of 3% if overseas counterparts were willing to settle trades in renminbis; as Chinese corporates know they are saving on foreign exchange costs that way. In any case, most Chinese companies’ daily costs – salaries, investment, production costs and so on – are in renminbis, so it makes sense to settle in the currency. Also, settling in renminbis is a natural hedge: companies don’t need to access the onshore foreign exchange hedging market to manage their currency exposure if they are receiving renminbis from overseas customers. And the flip side is that with the creation of a deeper pool of offshore renminbis, foreign companies have access to a wider array of hedging tools to manage their exposure: renminbi spot markets and options markets have all become widely used over the past couple of years. So this a win-win situation for both Chinese and foreign corporates. These days, the two big questions being asked by foreign companies are first, what they can do with renminbis stored offshore, and second, whether there are enough renminbi investment products available that allow them to park their money offshore, or whether they need to swap their renminbis back into another currency. And while everyone is focusing on the expansion of the dim sum bond market, or renminbi deposits being held by savers in Hong Kong, it’s often overlooked that China is continuing to open up its capital account. You are seeing more overseas investors pumping money into China through QFII [qualified foreign institutional investor] and RQFII (renminbi-denominated QFII] quotas, and a lot of foreign investors see this as a very positive move from the Chinese authorities. These investors are increasingly confident about using the currency as they know they can manage their risk, fund their requirements and invest their renminbi proceeds.
SW, BOCI It’s true that for Chinese exporters in particular, their profit margins are probably in the single digits, so if they save 3% in foreign exchange transactions, that makes a lot of difference to the bottom line. That’s why a lot of Chinese trades are now being settled in renminbis.
Euromoney It’s often said that China cannot have a fully international currency unless it has a deep, liquid yield curve. When do we see this being formed – and how vital is a fully functioning yield curve to the development of the renminbi?
JF, HSBC Earlier, we discussed the imminent creation of an offshore interest rate swap market as the result of a new CNY HIBOR benchmark. We believe that a fixing market is expected to be in place very soon. How liquid it will be at first remains to be seen, but this is clearly yet another very important development in the offshore renminbi market. There is already a very liquid and deep government bond yield curve in offshore renminbis over multiple tenors. Let’s not forget overall that the offshore renminbi market is very small compared with the onshore market, but despite this we have seen the market develop in leaps and bounds in recent years, and that steep upward progress is expected to continue for the rest of this year. If we look at the credit bond markets, what is interesting there is that we’re yet to move to a pricing methodology where we price at govies-plus-X or swaps-plus-X. That part of the market is still very much yield-driven. Asian investors have always been very hungry for high-yielding products, so the search for yield remains. If issuers are well known names and they are offering an acceptable yield to investors then deals are done very quickly. Yields in recent years have risen across the board, but we are still not pricing on a spread basis. Over time, that may change, and as the interest rate swap market develops and opens up, more sophisticated derivatives – caps and floors, options on rates and so on – will develop. They are there not for the benefit of banks but for the benefit of corporates that need to hedge their interest rate exposure in other currencies, so as these tools and markets gain in liquidity, more tools are created to respond to the individual demands of corporates. At the moment there is a lot of primary issuance going on and investors are mostly buy and hold, but there are enough choices now that investors have an increasingly good idea of where one bond should price against another and may look to sell one bond to buy a new issue, which can be done easily in the secondary market, which has also become more liquid.
SW, BOCI The beauty of the renminbi bond market onshore is the low level of volatility. There is one fundamental reason for that: the lack of hedge funds. Hedgies aren’t there in force, so they can’t short the market or play the spread. In terms of the yield curve, it’s true that China’s bond market does not have a uniform official government yield curve – yet. But it’s already close to being the world’s third-largest onshore bond market, and it has managed to gain in size and depth despite lacking a deep and defined yield curve, so who is to say that it absolutely needs one? Yet despite this there is a clear need to develop a very well defined and deep swap curve offshore to help the offshore renminbi market develop.
JF, HSBC We have seen a very long period of relatively low interest rates. When the interest rate outlook starts to change, I believe many investors would like to buy floating-rate notes, as some look upon these as a partial hedge against inflation. The difficulty will be finding issuers in this low-rate environment that are willing to issue this type of instrument. HSBC has done two such issuances, both of which went well, and we would be happy to find more issuers keen to do the same. There may also be issuers who have businesses linked to inflation – maybe some of the toll-road firms, or government-related entities whose pricing structure allows them to increase fees in line with inflation. That points to additional products such as inflation-linked bonds, which have been issued in other Asian currencies. That is probably a little further away for the moment though.
CM, BOCI This issue is also related to official policy. By the end of 2012, the outstanding amount of renminbi deposits held offshore was around Rmb900 billion, while the outstanding total of dim sum bonds stood at Rmb400 billion. So to a point there is a concern that the dim sum market hasn’t attracted as many issuers as might have been expected. But at the same time, we have also noticed that the Chinese government has simultaneously increased access to and use of other renminbi-related financial instruments. So we have seen the QFII quota increased to Rmb270 billion this year, from just Rmb20 billion a few years ago, and we are seeing the government roll out new pilot programmes such as the one permitting cross-border renminbi lending services in Qianhai, in Guangdong province. The development of Qianhai and other development zones like it will further boost the amount of renminbis crossing China’s border.
DDW, Swift What has surprised me is that if I look at the QDII (qualified domestic institutional investor) or QFII schemes, I haven’t seen an explosion of transactions there.
CH, HSBC QFII allowed foreign institutions to invest into China’s A-share market. It’s true that the QFII market, despite growing in size substantially in the past few years, remains relatively small compared with the overall A-share market [comprising leading Chinese securities listed onshore]. But take the wider view: QFII quotas are being ramped up and bond funds and renminbi-denominated ETF funds have been launched in Hong Kong. And in time, China will open its borders to allow more than just Hong Kong-based Chinese securities firms and fund managers to invest, in renminbis, in A-share stocks. Very soon that market is likely to be opened to Hong Kong-based banks and insurance firms. And interest is gathering pace: we are constantly talking to fund managers in the UK and Singapore wanting to know when they can obtain quotas to invest directly, in renminbis, in the A-share market. So although the market remains relatively small, it is developing rapidly.
Euromoney Will the renminbi’s current framework successfully help speed up the currency’s global expansion and increase its convertibility?
CH, HSBC China Securities Regulatory Commission chairman Guo Shuqing said earlier this year that the RQFII programme and the quota systems allowing investors to pump capital into China’s stock markets could ‘easily be expanded 10 times over’ at any time. But that depends on market demand: if you launch a big new market or boost quotas to Rmb2 trillion overnight and there is no take-up, it does nobody any good. So while the Chinese authorities plan to further open the capital accounts in good time, this process is a two-way street: we first need solid proof that sufficient customer demand is there as well.
Euromoney What needs to happen next to turn the renminbi into a truly global currency? When will China allow the capital account to open up? And what do issuers ask you every day?
JF, HSBC Issuers usually ask me what they need to do or what I need to do to raise money for them at a lower yield. That’s my daily question. From an issuer standpoint at this stage of the renminbi’s development, they can come to market, they can raise money, they can swap that back into other currency, or they can go through an approval process to move it onshore, a process that takes a few weeks but isn’t particularly onerous. In that sense, they are already getting what they need and what other markets can provide. Two further things though. First, the market is still relatively small, so although benchmark deal sizes have crept toward Rmb1 billion from Rmb500 million, and even though we’ve had a few issuances from lower-rated Chinese property firms raising closer to Rmb2 billion, most of the issuances remain mid-sized. That said, there are some large and interesting deals peppering the market, notably the recent World Bank sale, which came in at Rmb1.7 billion and was opened up again for an extra Rmb300 million – that’s the largest SSA [sovereign, supranational and agency] renminbi deal to date. So deal sizes are getting bigger and everything is moving in the right direction. Second, as renminbi pools outside China grow in size, we will continue to build up a more diversified investor base. Currently the biggest pool of offshore renminbi resides in Hong Kong, but large pools also exist in Singapore, London and even France. And as these pools increase in size and central banks become more involved in bilateral swap deals, and with long-term investors continuing to pile into the market, we are genuinely seeing the creation of an increasingly globalized currency. At HSBC we see increasing numbers of issuers who are taking a long-term view: they tell us that they are coming this year with a deal, and want to come next year with another one. Maybe they decide to move down the curve to a one-year renminbi bond sale, or up the curve to a five-year one from a three-year placement, so you are starting to see companies build their own curve in the currency. On the other hand, the other people we deal with on a regular basis are investors: they would love to see bid offers on the secondary market maybe being a bit tighter and deal sizes being on the larger side: all of this would boost liquidity. Another development would be a true and deep repo market, which allows certain investors to take a different view and short sell but still be able to cover.
CH, HSBC There is a further point to make about the involvement of the public and the private sector. Yes, banks and the private sector have put considerable time and effort into introducing the renminbi to customers: think here of the way the private sector innovates by creating new products, and how it helps pick the correct renminbi solution for each different client. This shows the power and influence of the private sector in terms of its ability to try to shape the market and increase the usage of renminbi across the board. But we shouldn’t neglect to consider the massive influence exerted by the public sector.
If you look at City of London initiative and at the Australia-Hong Kong renminbi dialogue, these are private sector led actions and initiatives but heavily sponsored by the public sector, a process designed to encourage greater private-sector activity, all of which boosts comfort and confidence in the renminbi. At the City of London forum last year, London banks were voicing their concerns about liquidity and, lo and behold, we then saw the Bank of England negotiating a bilateral swap agreement with the PBoC. This sort of active initiative imbues the market with a lot of confidence as they know there is always contingent liquidity available. So, yes, you need the private sector to get involved and engage with clients, tell them what the renminbi is, what it can provide and what opportunities are available to them. But you also need some level of public-sector support to show the markets that the renminbi is here to stay. We are hoping to see even more inter-governmental engagement on the renminbi.
SW, BOCI One of the key factors I believe that will continue to play out will be the types of new investment that will become available to people willing to hold the currency. Also we will want to see more investment channels open up, allowing offshore holders of renminbis to invest their currency reserves into the domestic securities market. So in the future we want to see more renminbi products rolled out, further opening of the Chinese domestic market to foreign investors, more renminbi bond deal flow, more two-way cross-border flows. All of this will aid the market’s further development. And underpinning all of this will be confidence: a widely held implicit belief that the renminbi is both fully supported by the Chinese government and is here to stay. The renminbi has quickly become one of the most stable currencies in the world, and with the current economic backdrop, including troubles in the US and Europe, the renminbi is likely only to grow in strength and confidence in the years ahead.
Euromoney Are there any final words for market participants out there? What further developments are we likely to see in the globalization of the renminbi in the months ahead?
WC, Citic Going back to the infrastructure issue, I want to flag up one final and very important issue, which is the development of China’s domestic bond market. We know that one of the key factors that you need to have in place in order to become a global reserve currency, or at least an important international currency, is that you also have a relatively well-developed bond market. But at this point in time, China’s domestic bond market is relatively backward. Of all the capital raised in China every year, just 12% is raised by the debt markets. Most financing still comes from the big state-owned banks. Unless this changes, China will struggle to create a truly global currency. Another factor in the development of the bond market is the glaring need to liberalize China’s interest rate policy: real market-oriented interest rates can only be formed by a real bond market, but as yet this has not happened. Fortunately, I believe the offshore renminbi bond market can offer some direction and guidance to officials looking to build out the onshore bond market. And I believe that the offshore renminbi market is being used as a pilot scheme: a way to build out a bond market and test-run it before recreating it onshore.
SW, BOCI I have a dream, a very simple and beautiful dream, involving the renminbi. It’s to one day wake up and find that instead of the US Treasury department issuing dollar-denominated bonds, it has decided to raise money from China in the renminbi. When that day comes, everyone will be happy.