The future of the RMB: special focus
Euromoney's latest coverage of how Beijing is seeking to globalize the renminbi, through currency swaps and trade-financing facilities; the rise of the offshore bond market; and how fee-hungry banks are salivating at the prospect of the RMB’s growth.
In 2016, China’s currency seemed on target for global reserve status. These days, the renminbi appears stuck in reverse, with Beijing looking on passively as its status shrinks and it slides down the global rankings.
Asiamoney ranks the top five counterparties and top three Asian counterparties in 11 different Asian jurisdictions as part of our 41st annual survey of liquidity consumption in the global FX markets.
This financial institution is clearly one to watch on a global scale, thanks to its presence in 57 countries and domination of the renminbi clearing market.
The renminbi's internationalisation may have taken a back seat for now, but its importance continues to rise among global corporations.
In 30 years, China has gone from a backward command economy to a global superpower, but what will the next 30 hold? Asiamoney picks 10 factors to watch, from the renminbi to bonds to wealth management, as we move towards the mid-century.
International IBs pride themselves on the diversity of their business in Asia Pacific, but a bank without a decent China business in this region is nowhere. It is the engine of both regional and global growth.
Volatility in China and increased onshore access means a greater need for hedging; Singapore also building offshore rupee traction.
The US’s great fear is that the BRI succeeds magnificently, leading to a future in which global trade, priced in renminbi.
China’s plan to internationalize its currency and embed it deeply into global trade has so far taken a back seat to the monumental task of building the BRI’s foundations. But over the last year, Beijing has been quietly pressing Sri Lankan banks and corporates to print renminbi-denominated panda bonds in mainland China.
Two borrowers beat US pressure by tapping into demand with euro and renminbi sales.
October 2018 “That’s why we are big in suggesting a lot of these projects should be invoiced and settled in RMB, and energy projects should be RMB-indexed…”
Following in the footsteps of Egypt and South Africa, Nigeria has signed up for a currency swap deal with China, but are swaps all they are cracked up to be?
As Chinese bond markets are set to be included in indices for the first time, a big change is coming to the global financial system. Chinese government bonds could become the new Bunds in portfolios, but Xi Jinping might have bigger targets in his sights.
Overlooked during the early years of the Belt and Road Initiative, the region is now central to the entire project. China is shifting its attention south, and it likes what it sees in the Asean zone: lending opportunities, ambitious consumers and fast-growing states and cities.
Five years after China launched its Belt and Road Initiative, its ambitions in the Middle East and Africa are beginning to go beyond infrastructure and oil.
Any slowdown in the economy of the country that consumes so much local output will bring short-term pain and should be a long-term warning. Some Latin American currencies are showing the first signs of a China crisis. As the renminbi has declined, so too have the currencies of Brazil, Chile and Peru.
The link appears to be finally taking shape, but with the dollar as its biggest trading and settlement currency, the scheme looks increasingly skewed towards investors in the US.
Bank of China International has established itself as the leading investment bank of China’s big four, but what will it take to make BOCI a real challenger to the international firms that it wants to compete with?
The winners of this year’s RMB survey are already benefiting from a new wave of liberalization across commercial and investment banking activity that will allow the currency to win wallets around the world.
View results of the Asiamoney Global RMB Poll 2018.
Instead of ignoring its colonial past, Macau is using it as a unique selling point for its renminbi clearing services by targeting Portuguese-speaking markets. But that business hasn’t arrived yet, and it will always struggle to overcome the challenge of the commodity dollar.
China’s interbank market trading platform and infrastructure provider has ramped up its technology partnership with NEX to capitalize on the ever-increasing appetite for algorithmic trading.China: Ministry of Finance auction casts shadow over dim sum
The Chinese Ministry of Finance successfully completed its second offshore renminbi bond auction, but poor investor demand for the offering raises questions about the future of the CNH bond market.
Analysts’ confidence that there is untapped demand from Chinese banks to trade offshore RMB is good news for R5, which last week announced a joint venture with Shanghai Clearing House designed to connect these institutions to the London FX market.
December 2017 Internationalization is starting to pay dividends in performance.
The People’s Bank doesn’t want a crypto-free country – it wants to own the market.
The only Asian market to match Singapore for growth in recent years is Hong Kong, which has managed to stay ahead of its regional rivals for offshore RMB.
A sharp decline in renminbi-denominated letters of credit and deposits in offshore centres have seen its standing as an international payments currency decline since 2016.
The service now handles offshore renminbi, Russian rouble, Turkish lira and Polish zloty trades against the US dollar and euro, alongside the other currencies settled on CLS.
Asiamoney has released the results of its sixth Offshore RMB Survey. HSBC retains its indisputable position at the top, followed by Standard Chartered and Bank of Tokyo-Mitsubishi UFJ.
The growth of renminbi trade has stalled, but it has forced a turning point to how corporates use the Chinese currency.
As the China International Payment System (CIPS) approaches its first anniversary, there is much anticipation around how the second phase of the project will impact RMB settlement volumes.
Wednesday’s decision by MSCI to delay membership for Chinese A-shares in the MSCI Emerging Markets Index serves a number of purposes.
QFII reforms will open up access to domestic stocks; China will have big weighting in EM index.
The January fall in emerging market currencies, the exodus of foreign capital and a global bear market in equities all point to a new financial crisis. How China reacts to this threat holds the key for emerging markets.
Beijing seeks to allay fears of China crisis February 2016
Market and currency turmoil weigh on growth; financial and stock market reforms needed.
Gap between onshore and offshore exposed; Hong Kong dim sum market in doubt.
Stock markets dropped sharply at the beginning of this year, driven by the apparently accelerating slowdown in the Chinese economy and the slide in the Chinese renminbi.
December 2015 Dollar dominance continues; RMB inclusion in IMF reserve basket symbolic.
One month in and it’s a case of so far so good for the China International Payment System (CIPS), even allowing for limitations in operating hours.
Having done well from their exposure to the RMB during the past decade, the currency’s surprise devaluation in mid-August should force Chinese companies to brush up on hedging strategies that were rusty at best, but many are instead simply focusing on opportunistic borrowing strategies.
China's quarter-point rate cut last Friday is the latest attempt to revive a flagging economy. But although currency liberalization is on the agenda in the longer term, the People's Bank of China is unlikely to be ready to cede control of the renminbi’s de facto dollar peg just yet as depreciation pressures grow.
RMB: ParFX offers USD/CNH trading October 2015
Offshore renminbi has passed another milestone, becoming the first non-CLS settled currency to be tradeable on ParFX – but China’s regime of exchange-rate controls still casts a long shadow over the market’s infrastructure.
Emerging markets are working for a multipolar monetary world. Beijing is spearheading the push to establish rivals to the World Bank to globalize the renminbi, establish markets for its excess capacity and plug the infrastructure deficit. But, for now, a post-Bretton Woods era is fantasy.
"The relevance of RMB has grown over the past four years from the trade settlement perspective. It will start to eat into the market share of other currencies." Markets mull RMB devaluation and Fed policy link
China’s shock RMB devaluation is unlikely to influence the Federal Reserve’s decision to hike, or otherwise, in September, but it could shape the path of subsequent increases, say analysts.
Foreign investors pull Rmb40.5 billion in two weeks; average P/E ratio still 66 times.
Analysts foresee a surge in corporate FX hedging activity, onshore and offshore RMB spreads to normalize, and a dip in dim sum issuance after the RMB’s shock adjustment.
Everyone knew a revaluation of renminbi was coming sooner or later, yet China's announcement, including reform of the dollar fixing mechanism, caught many off guard. The move left observers debating whether it was stimulating its economy or acquiescing to calls for exchange-rate liberalization.
China’s bid to join the currencies in the IMF’s SDR basket is more than a footnote of interest only to economists. Policymakers should take note.
Renminbi internationalization a big opportunity; commodities counterbalance bank retreat.
Recent data suggest that the momentum of the renminbi is slowing, particularly outside Asia.
The internationalization of the renminbi could be further turbo-charged if knowledge and liquidity concerns were addressed, according to a new study on corporates' views of the Chinese currency.
As China gradually loosens its grip on its FX regime, an ostensibly overvalued RMB is expected to fall back in line with global currencies, presenting a range of opportunities for traders, ranging from USD/CNH spot positions and the options market, to punts on the CNY-CNH differential.
China’s currency might look overvalued, but that is only half the story.
The need of banks to raise awareness and staffing levels around the renminbi within their own organizations looks set to be key as the battle for business heats up.
What goes up must come down, even the renminbi. Having appreciated by more than 30% since 2008 against a trade-weighted basket, there is growing consensus that 2015 will see further falls in the Chinese currency.
Capital controls have constrained the use of the renminbi in global trade, while China’s real economy has surged ahead. Despite the strict rules around its use, market players are punting on strong RMB growth in 2015, Euromoney’s Trade Finance survey reveals.
The continued internationalization of China’s currency and the emergence of challenger banks is set to define transaction banking in 2015.
Despite depreciation risk next year, amid the global currency war, market players say the battle between RMB offshore financial hubs and trading volumes will go from strength to strength.
The Hong Kong-Shanghai Stock Connect, which was launched amid much fanfare on November 17, has triggered a jump in CNH-funded arbitrage opportunities. However, rising Stock Connect volumes and easing by the People’s Bank of China – triggering a convergence between onshore and offshore rates – will remove current funding advantages.
Backed by its robust trading relationship with China, the east Asian nation is the latest fledgling offshore renminbi hub. Market participants shed light on South Korea’s renminbi bid as internationalization of the Chinese currency gathers pace.
Buoyed by its Indian success, the World Bank’s private-sector arm the International Finance Corporation (IFC) has set its sights on further extending the offshore renminbi curve.
The prospect of fierce competition between Chinese and western banks for international RMB business strengthens.
When it comes to the difficulties in liquidity management faced by treasurers operating in China, 21.3% say renminbi cash-pooling is top of the list of issues.
Percentage of cross-border trade settled in RMB
|Source: Euromoney Research Group|
Bankers are already seeing demand for direct renminbi-sterling deals, and anticipate a rise in volumes and market makers, since the announcement on Thursday it is now possible to directly trade these two currencies in China’s onshore interbank foreign-exchange market.
While renminbi trade flows between mainland China and emerging markets continue to grow, many domestic and western corporates remain reluctant to trade in the Chinese currency.
The renminbi’s meteoric rise as a payments and trade currency has brought it closer to becoming mainstream than ever before. Precisely when this will happen is anyone’s guess. That it will is inevitable.
|World payment currencies vs. trade
Global share (extra-regional trade only for Europe)
|Source: WTO, Swift, Standard Chartered Research|
The renminbi has risen dramatically as a world payments and trade-settlement currency in the past three years. According to the Chinese bank ICBC, it could become a mainstream international currency as soon as 2017.
Damian Glendinning, Singapore-based group Treasurer at PC maker Lenovo, sees two-way volatility in the renminbi (RMB) as a key hedging challenge for the company, and for the market, in the coming period.
Though Germany lacks sizeable RMB deposits and liquidity, Frankfurt is well-positioned to intermediate trading flows between China and the eurozone, but it lacks London’s financial depth.
The sharp jump in cross-border lending to China in recent years means capital controls are de facto broken. As a result, Beijing faces the “impossible trinity” – an inability to manage exchange rates, monetary policy and allow for free movement of capital, all at the same time. China faces an renminbi-policy crisis just as much as a potential credit crisis.
Competition among European financial centres to be the main renminbi trading hub is intensifying after the Bundesbank and Bank of England struck agreements with China to clear and settle payments in the currency.
Decline of yuan-way bets triggers financial stability fears
The longstanding one-way bet on USDCNY has been in disarray, but worse might be to come, as China looks to its FX regime to cope with credit issues, and likely defaults this year, threatening volatility in the structured-product market.
A shock policy-driven fall in the onshore spot rate has ignited speculation that a widening of the exchange-rate band is on the cards, while others are unsure the 'two-way' volatility presages a structural shift.
Transaction banks step up to multinationals' RMB liquidity challenge
Deutsche Bank has become the latest bank after Citi and HSBC to launch a service enabling the movement of renminbi-denominated cash between onshore and offshore accounts, crucially boosting companies’ liquidity in the currency.
CEO’s endorsement big boost to the City; renminbi bond issuance globally at record levels.
London and Luxembourg are at loggerheads to become Europe’s leading offshore renminbi hub – although they wouldn’t let you know it.
Concrete advances towards the full tradability of the Chinese currency are at last seemingly being made, helping to rebalance the country’s growth model but heaping on short-term risks to China’s economic and financial stability.
As competition between financial hubs heats up, London’s ambition to become the western destination of choice for offshore renminbi received a boost from crucial market players this week, following a flurry of successful renminbi-related developments in the City.
The country faces many problems in banking, real estate, consumption and demographics that cannot be quickly solved.
The renminbi’s impressive rise this year as a global trade finance currency is a positive development for a critical market that has been buffeted hard in recent years by limp demand and financial regulation.
With extended opportunities for UK investors in China through programmes such as the RQFII scheme, China Construction Bank opened its doors this week to London-based investors, signalling the strength of the Sino-UK relationship.
The renminbi has overtaken the euro to become the second most-used currency in trade finance, according to Swift, the financial messaging service.
Renminbi as world trade finance currency in value
At its Third Plenum, the Communist Party communicated its commitment to economic change. The country’s first free trade zone, in Shanghai, will act as the test bed, but without clarity on any number of policies, will international firms rush to set up shop?
China’s ambitious liberalization experiment in Shanghai, announced at the third plenum, could reshape national policy – but there are four key challenges that could thwart the project.
For all the focus on the Federal Reserve’s plans to start tapering its asset purchases, currency investors should also be looking at developments in China.
Swap agreement reflects growing trade; London has competitive advantage.
The US government has upped the ante in its criticism of China’s foreign exchange regime, but Lombard Street Research reckons the renminbi is, in fact, overvalued by 30% on a trade-weighted basis, citing, in part, rising unit labour costs and disinflationary pressures.
Demand for sophisticated cash management services in China is rising as the authorities press for greater business efficiency at home and Chinese corporates expand their foreign operations. Renminbi liberalization is another driver.
London should be wary of the Duchy’s ambitions to become Europe’s RMB hub.
Foreign investors wary of China onshore risks
The preferred method for playing Chinese credit markets remains the dim sum bond market, say analysts, as China’s expansion of access to its onshore market is met with a cool reception by foreign investors.
Emerging market (EM) currencies are expected to continue to expand their share of the $5.3 trillion-a-day global forex market despite the turmoil, with China’s RMB leading the charge.
China RMB debate: The renminbi’s road to full internationalization
Euromoney’s debate involving leading executives in Asian financial services throws light on the Chinese currency’s progress to full international status and the likely developments that will hinder and advance the process.
The appreciation of China’s renminbi in the face of deteriorating economic fundamentals and global disinflation represents a new normal in China’s political economy, but opinion is split about whether the currency is overvalued.
Investors looking to insure against the probability of a hard landing in China should look to the currency market.
Funding squeeze reaches peak; PBoC to safeguard stability.
London’s role in the global RMB market grew substantially last year, with business volumes and the number of renminbi products provided by London-based banks on the up, according to a new report.
For FX investors witnessing the volatility in high-yielding currencies, it might seem a strange time to warn about the potential bursting of a carry trade bubble, but one has managed to slip under the radar.
US falls behind the curve as China pushes forth with internationalization of the RMB
Chinese banks: too big to compete
Nominal GDP targeting – a new method in the Chinese monetary policy madness?
China: Cash management revolution under way
Special focus: Currency wars
The renminbi and cross-border trade: sightings of Bigfoot
China rebalancing: winds of change
London ramps up its offshore renminbi bid
Renminbi: Why not swap?
Bond markets: LatAm dim sum whets Asian appetite
UK policy hampers London’s RMB drive
Sources: Bloomberg, TMA, ANZ
F is forward rate; S is spot rate; d is the number of calendar days for day count adjustment; t is tenor and t=0 is spot.
Start planning now for RMB internationalization
China's government expands the role of the RMB
|Source: China Law and Practice|
Inside investment: Nudging 1.3 billion Chinese
Correlation of RMB to China composite
RMB payments grow 17.4 times
Growing international adoption of RMB payments
|Source: Capital Economics|
Deutsche Bank unveils massive expansion in China
Zhou stays firm amid China’s challenges