By Wendy Chan
Despite a recent controlled devaluation, the Chinese renminbi (RMB) continues gaining importance as a top payment currency.
The Chinese renminbi (RMB) keeps gaining global significance. According to data from SWIFT, the RMB was one of the top-10 payment and FX trading currencies in 2013. RMB global payment value has increased at CAGR (compound annual growth rate) of 200 percent per year since 2011.
Since 2008, the People’s Bank of China (PBOC) has signed RMB bilateral currency swap agreements with 24 central banks globally, totaling over RMB 2.6 trillion, thus providing foreign central banks an important avenue to secure liquidity in the event of an RMB shortage.
To track the momentum of RMB internationalization, one should consider monitoring Standard Chartered Bank’s Renminbi Globalization Index (RGI). This index was launched in November 2012, with the RGI’s base value set at 100 as of December 31 of 2010. The index covers the top four markets in offshore RMB business, namely Hong Kong, London, Taiwan, and Singapore. It measures business growth in four key areas—deposits (denoting store of wealth), Dim Sum bonds and CDs (as vehicles for raising capital), trade settlement and other international payments and foreign exchange. RGI is the first industry benchmark that effectively tracks the progress of RMB business activity, according to SCB, and offers corporates and investors a quantifiable view of the latest trends, size and levels of offshore activity driving RMB adoption as an international reserve currency.
At the recent NeuGroup Asia Treasurers’ Peer Group meeting in October 2013, Carmen Ling, Managing Director, Global Head RMB Solutions, Wholesale Banking, Standard Chartered Bank told members that “size plus growth equals success,” was the formula China needs to be successful at internationalizing its currency, citing the euro’s internationalization in the 90s and the yen’s in the 80s as examples. Although she noted that both those currencies have struggled in the growth category—the yen for many years and the euro more recently—China scores well for both size and growth and once it gets its regulatory house in order the RMB should do well globally.
pillars of growth
There are four pillars supporting the RMB’s global ascendance:
- Economic clout: China, currently the second-largest economy, likely will take the number-one position before 2030.
- GDP growth: China is amongst the fastest-growing economies.
- Political will: China’s government has made RMB internationalization a high priority.
- Depth of financial markets: there are rapid developments in the various offshore RMB centers (Hong Kong, London, Taiwan, and Singapore).
With the expeditious developments in the RMB, it is understandable that offshore financial centers are keen to get into the groove of all this action. In late October 2013, Singapore and China announced new initiatives to strengthen cooperation on financial sector development and regulation. These new initiatives aim to promote the international use of RMB through Singapore. For example, there is the Renminbi Qualified Foreign Institutional Investor (RQFII) programme, which will allow qualified Singapore-based institutional investors to channel offshore RMB from Singapore into China’s securities markets, and the Renminbi Qualified Domestic Institutional Investor (RQDII) scheme, which will allow qualified Chinese institutional investors to use RMB to invest in Singapore’s capital markets. Both countries will also introduce direct currency trading between the Chinese yuan and Singapore Dollar, and strengthen regulatory cooperation as in the collaboration between Singapore Exchange and Shanghai Futures Exchange in developing commodity derivatives. In addition, they have agreed to strengthen cooperation in banking regulatory issues, through exchanges and dialogues on topics of shared interest, and enhanced coordination on international regulatory issues.
loosening constraints
The establishment of the Shanghai Free Trade Zone (FTZ) also is expected to provide a boost to its ambitions of becoming a full-fledged international financial center by 2020. The FTZ promises policies and privileges that liberalize the foreign exchange, cross-border investment flows and interest rates, alongside wide-ranging reforms to trade in goods and services.
The SFTZ is focused on four key areas for reform and rule liberalization, including (1) governance, for instance by simplifying procedures for establishing new businesses with a speedier application process, (2) investment—by easing the barriers for both incoming and outgoing investment of capital and providing for equal treatment of both foreign and domestic investors, trade and financial services, (3) trade—the government is keen to make China a more attractive place for foreign firms to establish regional headquarters, and finally, (4) financial services—capital account convertibility, interest-rate liberalization, cross-border RMB investment and financing and further opening markets to eligible domestic capital and foreign financial institutions.
By relaxing rules governing these activities China hopes to accomplish a number of goals, including the attraction of regional treasury centers, product innovation within financial institutions and flexible financial transactions for foreign and Chinese firms.
CHINA LOOSENS UP
Long viewed as very restrictive, bureaucratic and perhaps even oppressive, China is out to become more aligned with western nations in how it governs business operations.
The government’s tactical approach begins with, as mentioned, simplifying procedures for establishing new businesses with a speedier application process. But also, starting this month, China is changing the current paid-in capital regime to a subscribed capital regime. Under the paid-in capital system, the initial capital contribution could not be less than 20 percent (15 per cent for foreign invested enterprises) and the registered capital could not be fully paid within two years from the date of establishment of the company. Now those restrictions on the ratio of initial capital contribution and the time limit for capital contribution will no longer exist.
China also intends to break down the supervision silos through a technology platform that links different governing agencies in addition to streamlining customs and port supervision.
taking it SLOW
The success of the experiment in allowing RMB convertibility in the Shanghai FTZ will enable the Chinese government to ease into liberalizing the RMB at the national level. This seems aligned with its overarching plans to make the RMB a global reserve currency, with Shanghai potentially becoming a major center for RMB trade.
According to Standard Chartered’s Ms. Ling, international currencies “should have three basic characteristics: convertibility; broad acceptance and wide use in various areas of international trade, settlement, investment, debt payment; and stable value.”
While the RMB still has a long way to go before it is fully convertible and recognized as a global currency on par with the US dollar, euro or yen, the focused and aggressive approach of China’s central bank will speed up the process. Thus the RMB has great potential to significantly alter the Asia financial landscape. The expectation is that there will be more RMB clearing arrangements in other countries, such as Vietnam and Thailand. There will also be more experimentation with cross-border flows and more designated zones akin Shanghai’s. The goal is to liberalize the movement of cash in and out of China and with a public commitment for this to happen by 2020, it’s likely China will do what is necessary to make it a reality.