Over the last few years, Renminbi (RMB) internationalisation has gone full steam ahead against the backdrop of the appreciation of the currency. Following the recent reversal of RMB exchange rates, people have started to ask: “Will RMB internationalisation be put on hold?” On the contrary, with the gradual formation of a market-oriented mechanism for RMB exchange rates, internationalisation is playing a more important role in indirectly facilitating China’s economic globalisation.
During the RMB internationalisation process, we have witnessed the development of RMB from solely a trade currency to an investment currency. Further to these developments, the inclusion of the RMB in the IMF's Special Drawing Right basket last year recognised it as a reserve currency in the international arena.
With the depreciation of RMB against USD, the gradual decline in offshore RMB deposit pools has become a market focus and raised concerns about how this may impede RMB internationalisation.
We need to look at the bigger picture when we examine the development of the offshore RMB market. The internationalisation of RMB is a long-term journey. Take Hong Kong as an example: offshore RMB deposits amounted to RMB546.7bn at the end of December 2016, falling to a level equivalent to that at the end of September 2012 (RMB545.7 billion). However, RMB product suites have become more diverse in the past five years. In addition to offshore RMB foreign exchanges, bonds, equities and derivatives, mutual market connectivity between offshore and onshore capital markets have also been introduced. Such diversification allows more international investors to access the Chinese market.
At present, the daily spot trading volume of offshore RMB is estimated to be between USD10bn and USD12bn, with the daily turnover of RMB forward contracts reaching some USD20bn.
Despite the contracting offshore RMB deposit pool, international investors investing in RMB is a reflection of their confidence in China’s economic outlook. China’s economic growth transition and structural reform encourage emerging industries and high-tech services (such as technology and environmental protection sectors) to work towards a sustainable growth model, which attracts many investors. The “Shanghai-Hong Kong Stock Connect” and the “Shenzhen-Hong Kong Stock Connect” are the most convenient ways for international investors to buy into the new Chinese economy directly with RMB. The ‘Connect’ program has a pivotal role to play in RMB internationalisation.
The onshore market has also made remarkable progress over the past 12 months. For example, the direct foreign exchange trading of more foreign currencies facilitates cross-border activities in RMB with China’s trading partners. China has approved the first batch of foreign banks to participate in the inter-bank foreign exchange market. It has launched a pilot scheme to allow 21 state-owned enterprises to directly issue external debts and to deploy the proceeds for onshore and offshore activity based on their own needs.
Recently, China's State Administration of Foreign Exchange (SAFE) issued new guidelines allowing eligible foreign investors to transact foreign exchange derivatives in the onshore FX market to hedge CNY exposures, resulting from their purchases of Chinese bonds. This marks continued efforts to further promote capital markets liberalisation, and improve market accessibility that helps pave the way for potential bonds benchmark inclusion for China’s interbank bond markets (CIBM). With this opening up, CIBM foreign investors can now access both CNH and CNY FX spot and derivatives markets, driving convergence of onshore and offshore FX markets. This new development will help meet investors’ demands for hedging currency exposure arising from their CIBM bond investments, enriching the RMB product suite for foreign investors with more direct and efficient hedging instruments.
Other initiatives include the promulgation of the “Guidelines on Credit Default Swaps”, in view of growing demands of credit risk management instruments among market participants, as well as the permission granted to enterprises to issue cross-border RMB bonds in the Shanghai Free Trade Zone. The onshore capital market is becoming more mature and will be integrated with the offshore market in the long run, which will be another milestone in the internationalisation of the RMB.
China’s capital account is not yet fully open, so there is still a price discrepancy between onshore and offshore financial instruments. However, the gap is expected to reduce with the gradual liberalisation of the onshore capital market and improvement in the two way flow of funds between these markets.
Concerning RMB financing, issuers can now raise funds via either the onshore or offshore bond market. Beijing is gradually opening up its Panda Bond market. The funds raised can be used either for domestic purposes or for cross-border transactions. Conversely, overseas subsidiaries of Mainland enterprises can raise funds through Panda Bonds to support their mainland businesses or “going out” projects.
These diversified offshore products and sufficient liquidity are critical to meeting the increasing market demands for hedging, financing, investments and other transactions in RMB. Parties to cross-border transactions and investments can fully deploy various offshore RMB derivatives to manage exchange rate and interest rate risk, which in turn increase the willingness of investors to use and accept RMB, which is a powerful backing of the expansion of of Mainland companies and the Belt and Road Initiative.
(Candy Ho is the Global Head of RMB Business Development, Markets, HSBC. The view expressed in the column is that of the author.)
