11 April 2016

Take the long-term view on RMB internationalisation

It would be fair to say that the steady five-year march of the renminbi's (RMB) or yuan's internationalisation has been slightly knocked off its stride in recent months by the currency's depreciation. However, this should be viewed by Singapore companies and market participants in general as part and parcel of a maturing currency.

Guy Harvey-Samuel

Group General Manager and Chief Executive Officer, HSBC Singapore

China is a vitally important corridor for Singapore a point recognised by the Singapore government and the Monetary Authority of Singapore through the various initiatives undertaken in recent years to increase yuan liquidity in Singapore.

These have included the doubling of Singapore's RQFII (renminbi qualified foreign institutional investor scheme) quota, announcing a bilateral swap agreement, and enhancing Singapore and China's free trade agreement.

On March 25, the People's Bank of China (PBOC) announced that companies in the city of Chongqing can now issue yuan-denominated bonds in Singapore and fully repatriate the raised funds. At the same time, the PBOC advised that equity investment funds in Chongqing can make direct investments outside of China, including in Singapore and the Asean region.

These announcements are a reminder to financial institutions and corporates in Singapore to not lose sight of the bigger picture when it comes to yuan internationalisation.

Initiatives such as these will further encourage local investment and raise yuan liquidity in Singapore and, in the longer term, facilitate fresh equity raisings denominated in yuan to tap the vast appetite for investment products in China.

The Chongqing announcement is yet another move to increase the Lion City's level of yuan liquidity, and will no doubt play a role in contributing to the growth of the offshore RMB market in Singapore.

The announcements are also timely as corporates grapple with the PBOC's move to transition the yuan from a highly managed FX regime to more of a floating one.

The yuan's journey from a widely-used global trade currency to a viable investment currency, and soon a reserve currency, has been underpinned by China's commitment to making its currency more market driven. This saw a significant change in the second half of 2015.

Since August, China has been trying to go about this at a gradual pace, but that has been challenged by the rising size and breadth of capital outflows, which has led to a depreciation of its currency.

The move to a floating currency has also created a flurry of activity among Singapore corporates and the financial markets broadly which had previously been used to the currency being a one-way bet. The volatility has generated general cautiousness among corporates and led many to rethink their foreign exchange strategies including revising hedging positions.

Singapore has not been immune to these dynamics. Singapore's yuan deposits, a key driver in the growth of the offshore market, dropped 16 per cent quarter on quarter at the end of 2015.

Moreover, a tightening in offshore liquidity has, in turn, led to higher offshore funding costs which have hampered growth in local RMB assets and RMB bond issuances.

While the currency's movement has received most attention over the past months, the reality is China is moving towards greater currency liberalisation, and it has not lost sight of its long-term objectives for capital account liberalisation and yuan internationalisation.

Despite these short-term market gyrations, with China being the world's second largest economy and biggest trade and investment source, it is inevitable that the yuan will continue to play an increasingly important role in trade payments, financing and investments.

Viral milestone in RMB internationalisation

HSBC predicts that 50 per cent of China's trade will be settled in yuan in 2020, up from 3 per cent in 2010. Along with yuan trade settlement, 736 billion yuan (S$154 billion) in China's total outbound direct investment was settled in yuan in 2015, a 295 per cent year-on-year increase.

The yuan's internationalisation reached an important milestone when it was invited to become a member of the International Monetary Fund's Special Drawing Rights club. Taking effect later in 2016, the inclusion enhances market confidence in the currency's accessibility which will, in turn, give greater confidence to companies and institutions around the world to settle trade in yuan and invest in RMB assets.

Another important change came in February when the PBOC announced it would open the onshore interbank bond market to foreign investors with no quota restrictions and streamlined regulations. Over time the impact on global portfolios could be significant.

Indeed, the most obvious way in which this could affect the investment landscape is if China is included in global bond indices. The impact of China's inclusion in the major bond indices would be significant, given the size of the market and the amount of money globally managed against published indices. If this happens, China would rank as one of the largest components of global bond indices, after the United States, Japan and the eurozone. Statistically, a 10 per cent foreign participation would already represent around US$500 billion of new investment.

This would certainly be something to watch out for as the yuan moves inevitably towards reserve currency status. China's rise as an economic power has been one of the defining themes of the past two decades, and the yuan's eventual rise to becoming a major international currency would be a key milestone for this decade one which will benefit both China and the rest of the world.

The short-term volatility which accompanied the yuan's depreciation in recent months should be viewed in the context of a maturing currency. And announcements such as those associated with Chongqing should be a reminder for Singapore corporates and institutions to take the longer term view when it comes to the yuan.


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