The devaluation of the renminbi in August 2015 was a heart-breaking moment for all parties involved in regulating, marketing and selling it as a promising global currency. Within the space of a few months, the change in fortunes of the currency exposed its rather shoddy foundations.
The reason was simple: most parties had boarded the renminbi internationalization train as a purely speculative bet, either riding the currency’s seemingly never-ending appreciation or squeezing everything they could out of a very successful carry trade, where they raised cheap dollars offshore and moved those funds to higher-yielding renminbi assets, further pushing up the currency’s value.
But all that pain was in some way necessary, despite the bleeding of foreign exchange reserves that China went through to defend a falling renminbi against the shorts and the world-wide mockery the country went through for even daring to think of challenging the all-powerful dollar on the global stage.
In hindsight, the point of the whole sorry exercise was to force a hard reset of the status quo among Chinese and global companies when looking at the renminbi as a trade, funding or investment vehicle. The People’s Bank of China sent a clear message that the renminbi is not, and never shall be, a one-way speculative bet, at least not so long as the central bank and the Chinese Communist Party have ways to prevent it.
One trillion dollars in foreign exchange reserves were spent on defending the currency: the markets conceded, China won. At least that is the message being conveyed by the key global players in this area.
“With the 2015 events, many companies felt the pain of not having invested in the right hedging policy for this new emerging international currency,” says Vina Cheung, global head of renminbi internationalization at HSBC. “This process of the last two years is a good educational journey.”
HSBC, the most Chinese of global banks, is once again the winner of this year’s poll, nabbing the top spot for the seventh consecutive year.
While the poll ranking – based on 2,026 valid responses from 1,877 different companies – has not changed much, the banks Asiamoney spoke to acknowledge that Chinese institutions are increasingly stepping up to the plate – a trend that is overdue.
The heart of the renminbi business is still vanilla in many ways. About half of the respondents to the survey say that they use banks for simple renminbi deposits, payments and foreign exchange services. About a quarter venture into renminbi loans and trade financing. Hedging does not seem to be a big concern, even now, with just under 8% of respondents picking it as a service they have used over the last year.
FX gives another glimpse into how important or not the renminbi really is for these corporate customers. The renminbi is one leg of all FX transactions for 15% of the respondents, but as low as just 1/10th of all transactions for 21%.
With the renminbi up 2.7% against the dollar this year and 8.7% in the last year, it seems rather easy to look down at the 2015 and 2016 crash as a blip. After all, markets famously have short memories. But recent developments seem to justify the new-found optimism among renminbi believers.
Such progress raises the prospect of reaching an end game for the currency. That end game, clearly, is freedom or, more specifically, full convertibility under both the capital and current account.
Such an opening would bring to an end the split existence of the currency so far: a restricted one onshore as the CNY, and a free, but rather small, offshore market in the form of the CNH.
Candy Ho, HSBC
“The two markets are kind of going to, not to say the final leg, but integrating more,” says Candy Ho, global head of renminbi business development at HSBC.
Bond Connect, launched in July last year to link offshore investors to the onshore interbank bond market, was the first crucial step on that path, but a series of other relaxations have also taken place. These include, for example, the re-opening of the tap for foreign companies to easily sweep renminbi in and out of their Chinese operations. The tweaks have radically changed the outlook for the currency since the RMB poll was conducted last year.
Back from the dead
Now for some numbers. The CNH bond market, known as the dim sum market, is back from the dead, and with a vengeance. From the start of 2018 to the middle of May, deal volume is 11 times bigger and the number of deals is 14 times larger than in the same period last year. About Rmb30 billion ($4.7 billion) has been raised through syndicated deals alone, according to Asiamoney’s sister publication ‘GlobalRMB’.
In the onshore bond, panda, market for foreign issuers, deal volumes and numbers are even larger: Rmb40 billion across 20 deals, up 46% and 85% respectively on last year.
HSBC is the second-largest overall and second-largest foreign underwriter in the two markets, respectively, behind Standard Chartered, according to ‘GlobalRMB’ and Dealogic data.
Rebooting cross-border sweeping and pooling facilities is hardly click-bait headline material, but it has made a difference.
Cheung notes that these facilities, which were halted in 2015 when regulators felt the need to bring exchange rate fluctuations back under control, are a basic building block to push the internationalization process ahead.
Regulators have not stopped at giving the green light to old schemes, but have also expanded the capital limits for sweeping funds from 30% to 50% of the onshore entity’s equity, giving chief financial officers more flexibility in managing their cash.
Mizuho, which breaks into the top five in this year’s poll, tells Asiamoney it has seen a clear turnaround in cross-border renminbi business for corporates.
“Customer demand for renminbi cross-border settlement and cross-border pooling is very strong,” says Mizuho Okuno, deputy general manager of the global transaction banking department at Mizuho (China). “The clients still have a strong appetite; we have had 10 new clients taking advantage of two-way cross-border pooling in the last year alone.”
These services are widely seen as triggers for every other bit of the banks’ renminbi offering. Simply put, without basic trade channels to breed offshore renminbi liquidity, there can be no such thing as a global renminbi.
“This is a fundamental process that the integration [of onshore and offshore renminbi markets] must have from an operational perspective,” Cheung says.
There are a lot of smaller Chinese clients with overseas projects. Instead of establishing an operating or treasury centre outside of China, with an FTZ account they can efficiently manage overseas exposure- Candy Ho, HSBC
MUFG Bank, which holds onto second place in this year’s poll, is buoyant on that trade element. The Japanese lender has positioned itself as the key player to facilitate the commercial flows between Japan and China.
Bilateral trade between the two countries amounted to $214.2 billion in the first nine months of 2017, up 7.8% year on year, according to data from China’s ministry of commerce. China is Japan’s second-largest export trading partner and largest import trading partner.
For MUFG, the bank’s renminbi efforts have revolved primarily around providing research, market and policy insights on China to its clients.
Survey respondents echo the need for such regular updates, given China’s unpredictable and fast-paced policy developments. When asked about their chief concerns regarding renminbi services and products, a third of all respondents picked regulatory requirements; payment requirements and currency volatility each accounted for just under 29% of votes, while market volatility ranked fourth with about a quarter of the votes.
MUFG says its approach has been crucial for Japanese companies getting familiar with China as a market and the renminbi as a currency.
“We continue to provide this support; that is how we gain trust from these Japanese corporates,” says Yang Xuping, head of the global marketing group for east Asia in the global markets division at MUFG Bank.
Persistence even in such lower-margin business offerings has been important, especially because the bank acknowledges the knock-on impact of the 2015 and 2016 volatility on renminbi service volumes in the last calendar year.
“Volumes saw a bit of a drop in 2017,” admits Yang.
Things have turned around, however. Some businesses at MUFG are already experiencing a comeback; for instance, foreign exchange transactions are up 3% in the first four months of the year, the bank tells Asiamoney.
The bank is also benefiting from a rise in outbound activities from Chinese clients, whether for M&A or Belt and Road Initiative projects, which the bank says are creating a whole new – and increasingly important – revenue stream.
Chinese exporters are also becoming more proactive in asking for trades to be settled in renminbi. In the early years, Chinese companies faced too many constraints in obtaining foreign currency through channels other than trade, which made it hard for them to forego the opportunity to access dollar funds and switch to renminbi as a settlement currency.
Some developments have clearly changed the narrative on China’s opening of trade and renminbi internationalization.
Bond Connect was greeted as a big shift, as it threw the doors wide open to China’s $10 trillion-plus bond market for the first time without the need for quotas or painful regulatory screening processes.
Survey participants seem to be still weighing their options, however, with 62% saying their investments in renminbi-denominated instruments would not change over the next year. On the plus side, a third say they would increase such investments, while only 4% expect a decrease.
MUFG is working with its clients to make the most out of the bond market opening, though its efforts have been partially limited by the speed at which regulators have been handing out underwriting and trading licences in the onshore market.
Augusto King, head of the capital markets group at MUFG Securities (Asia), says he is satisfied with how the bank has found creative ways to participate.
“Unfortunately, [onshore] licences are limited so far,” he tells Asiamoney. “But despite the limitations, we work within that framework to introduce our clients to the domestic market.”
He gives the example of the work MUFG has done on recent asset-backed securitization (ABS) deals by auto finance companies onshore, as well as the work it did for Air Liquide on its panda bond. On all these deals, the securities house worked as a structuring agent rather than an underwriter.
MUFG has also made its own debut in the market, pricing a panda bond in January this year, with a Rmb1 billion three-year private placement.
“For now, that is what we do without those licences, but we are very keen for the market to open up, we want to go big in China,” says King.
Mizuho has also dipped its toes in onshore ABS, a market it first entered in 2016, advising both Japanese and American auto manufacturers on transactions.
“We have a strong pipeline of ABS deals involving new and existing clients,” says Hiroaki Masuyama, assistant general manager of the strategic planning department at Mizuho (China).
Survey respondents are taking the slow route to the capital markets, by and large. Nearly two thirds (65%) of respondents say they have not tapped either debt or equity renminbi funding channels in the last 12 months, and 60% say that would stay the case for the next 12 months.
Debt was only slightly more popular than equity overall, just 3% say they have borrowed in renminbi.
Perhaps crucially, underlining the still limited trust in renminbi markets as a sustainable funding source, 48% say they are not interested in either holding or issuing renminbi-denominated debt instruments.
China’s Belt and Road Initiative deserves a mention, too. Dismissed by some either as a pure geopolitical (even neo-colonialist) play, or as an empty public relations effort from a nation that scores low on soft power, the initiative is well under way, and banks acknowledge that financing for bridges, ports and power stations across at least three continents comes with an increasing amount of renminbi tied to it, which will impact the bottom line over the coming years.
MUFG has seen this develop in very practical, unexpected ways.
“Now, when we visit our customers, we need to bring a world map. That never happened before,” says Edward Zhou, head of global customer marketing at MUFG Bank (China).
The bank did not disclose individual client projects, but its executives tell Asiamoney it has worked with large, state-owned enterprises venturing overseas by providing funding and hedging services in a number of regions. Latin America was one of the hot spots, where Chinese corporates have been seeking funds for infrastructure and utilities projects.
“We closed a lot of deals, and we keep going. The growth in this area is more than double digit every year,” Zhou adds.
BRI has also found a surprising link with the onshore free trade zone (FTZ) experiment, first launched in Shanghai in 2014 as a pilot area for new liberalizations.
The FTZ has become a channel through which smaller domestic firms can tap the offshore market for risk management instruments that are not easily available onshore.
“There are a lot of smaller Chinese clients with overseas projects,” says HSBC’s Ho. “Instead of establishing an operating or treasury centre outside of China, with an FTZ account they can efficiently manage overseas exposure.”
The plumbing of renminbi internationalization is also falling into place. The banks acknowledge that the launch of the second phase of the China cross-border interbank payment system (Cips), which extends clearing to 24 hours a day on weekdays and adds operating hours on weekends, has effectively put in place a basic global clearing facility for the renminbi.
“It is a big deal,” says Cheung.
The next step – opening interbank money markets overnight to allow banks in any time zone to access onshore liquidity around the clock – should further consolidate that progress and finally drive up renminbi payment volumes beyond Asia, she adds.
Chinese regulators are also ready. Bond Connect now offers the opportunity to hold and trade onshore renminbi instruments from offshore.
Soon, Ho suggest, that might be possible for Stock Connect trading, too.
Taken together, these upgrades speak to a larger integration of Chinese and global financial markets that banks can tap into; that gives substance to the idea of a renminbi internationalization journey that is entering its final leg.
“We are seeing the integration of the local onshore market into the global financial system,” says Ho. “A lot more offshore participants, banks and market makers can access the onshore financial market.”
HSBC sits in a good position, not least because of the recent launch of its majority-owned onshore securities joint venture, called HSBC Qianhai Securities, which will continue to help the bank make the most of its onshore, offshore and cross-border renminbi capabilities.
MUFG, which does not yet have a local joint venture, is nonetheless seeking to expand its onshore offering to keep up with a relentless move towards China’s ultimate opening.
“There is a lot of effort at the top of MUFG to lobby for more activities in China,” says King. “Our branch network in China is already impressive – we have 14 branches. It shows the commitment we have to the country. We hope they open up further so we can play in the domestic capital markets business as well.”