Slowly but steadily, the renminbi is going global, but for the Chinese currency to become truly international, the network of offshore centres and linkages needs to be expanded around the world.
Beijing has sought to strengthen the international role of the renminbi, better known outside China as the yuan, as part of its broader plan of greater financial integration with the global economy. Establishing the renminbi as an international trade-settlement currency – the first stage of its internationalisation programme – is already well under way, boosted by China’s position as the world’s largest trading nation.
Last year, 18 per cent of China’s total global trade settled in renminbi, compared with 2 per cent in 2010. The renminbi surpassed the Swiss franc to become the seventh-most-used payment currency, according to the Society for Worldwide International Financial Telecommunication (SWIFT).
We expect the renminbi is on track to account for 30 per cent of total China trade by the end of 2015 and may achieve full convertibility in two to three years.
While China’s onshore markets are still subject to interest and exchange-rate controls, the offshore renminbi market operates as an open market, embracing the gradual liberalisation policy taken by the Chinese authorities. This provides greater product innovation and market price transparency, and as the pool of available liquidity grows, more incentive and scope for overseas enterprises and financial institutions to conduct business and financial transactions in renminbi.
Hong Kong has been the testing ground for the internationalisation policy and is still the largest offshore renminbi centre. After a decade of development, Hong Kong accounts for 70 per cent of the 1.68 trillion yuan worth of bonds, certificates of deposit and bank deposits that make up the global offshore renminbi pool. We expect renminbi deposits to represent about 40 per cent of Hong Kong’s total deposits by 2024, up from the current 12 per cent.
China’s central government is building on its successes in Hong Kong to expand the renminbi’s geographic footprint. New clearing centres have been established in Taiwan and Singapore; deals have been struck to expand the network to London and Frankfurt; and Sydney and Toronto are widely expected to be added to the roster in the near future.
The expansion is strategic. Singapore aims to serve Asean countries, and deposits hit 200 billion yuan (Bt1 trillion) at the end of last year. Taiwan is handling cross-strait trade and financial transactions and its renminbi deposits rose to 182.6 billion yuan, but both are still a long way off catching up Hong Kong’s 860.5 billion yuan as at the end of 2013.
The addition of London and Frankfurt expands the real-time trading potential of renminbi. London is the world’s largest foreign-exchange trading hub, and planted its flag as a future renminbi centre in April 2012 when HSBC issued its first offshore bond in the city. London already accounts for more than 60 per cent of renminbi payments outside Greater China (which includes Hong Kong).
We believe the offshore centres are complementary rather than competitive. The participation of other overseas markets, especially the ones that have significant trade ties with China, is very important if the renminbi is to be globally accepted.
We also believe offshore renminbi liquidity will continue to expand, both within each renminbi offshore centre and in new ones to be established in the years to come.
In the shorter term, we believe China’s revised agenda for financial reform will help pave the way for further development of the offshore renminbi into a transaction currency beyond cross-border trade settlement, and to emerge as an investment currency.
Offshore renminbi usage has substantial room for growth. About a quarter of US-dollar deposits are held offshore: The entire offshore renminbi asset base – bonds, certificates of deposit (CDs) and deposits – currently accounts for less than 1 per cent of onshore renminbi deposits.
But it is growing fast. The offshore investment market has expanded in tandem with the growth in liquidity and a wide range of products are now available. There were 371 billion yuan worth of dim sum bonds (those issued outside China but denominated in renminbi) issued in 2013 (including CDs), up 36 per cent year on year. At least 40 central banks have invested in the renminbi and 23 countries have publicly declared their holdings in renminbi, in either the onshore or offshore markets.
However, despite the introduction of all these different products, it is fair to say that offshore renminbi investment flows remain lacklustre and are largely limited to institutional investors.
If China is to have a truly global reserve currency – as befits the world’s second-largest economy representing around 12 per cent of global gross domestic product and 12 per cent of world trade – the renminbi must become fully convertible.
There are still limitations on the flow of funds between the offshore and onshore renminbi markets. The renminbi is to all intents fully convertible on the current account, but certain capital-account items such as direct investments can only be conducted under specified quotas. The experimental zones like the Shanghai free-trade zone will help connect the onshore and offshore markets creating more investment flows.
The Chinese government is committed to removing market-distorting regulations, but this will be a paced process and not something that can or should happen overnight.
We believe that as the barriers to capital flows are stripped away, exchange and rates will be allowed to float. The onshore and offshore markets will converge and renminbi will one day become as ubiquitous as the US dollar.
Candy Ho is managing director and global head of RMB business development in markets, HSBC.