November 14, 2018
Despite the tough talk on tariffs between China and the US, renminbi internationalization continues apace
No matter what happens to the trade saber rattling between China and the US, the inner workings of renminbi (RMB) trading and transaction execution are on track to modernization. That’s because the Chinese government wants to continue opening markets and internationalizing the RMB. As they and many businesses in the region see it, the RMB is becoming an important currency for cross-border trade and investment.
Since the start of internationalization in 2009, the effort has provided many more financing possibilities for import and export companies; further, investment channels have been increased and the business environment has improved. Companies say the RMB’s role internationally has facilitated transaction processes and helped companies avoid exchange risks.
In the meantime, given the current trade conflict, there has been pressure on China to maintain a stable exchange rate and not let the RMB depreciate too fast (keep below 7.00) and risk escalating trade tensions further. Local banks were “quite firmly in the market” to support the RMB, according to bankers at a recent NeuGroup FX Managers’ Peer Group meeting.
China wants to build its onshore options market, and one way to promote its use is to apply a lower reserve charge (mandatory interest-free PBOC deposit based on the notional trade amount) on options of 10%, rather than the 20% for forwards (no, no synthetic forwards using options are allowed).
And because the charge is limited to one year, it also serves as an incentive to extend hedge tenors, which would build up liquidity in the longer tenors; the most common tenor now is one year or shorter. Still a corporate concern with the reserve charges is whether they apply when rolling over hedges. Anton said they do not; all you need to do is a new spot trade.