China to expand cross-border investment, fortify yuan
CHINA’S central bank vowed to expand cross-border investment and financing channels to boost opening up of the country’s financial market, according to a recent key report.
The People’s Bank of China (PBoC), the central bank, will support foreign central banks, monetary authorities and reserve management departments to increase Renminbi(RMB) denominated reserve assets in their portfolios to strengthen the Chinese yuan’s role as a global reserve and investment currency, according to the PBoC’s 2021 RMB Internationalisation Report, which was published on September 18.
By the end of June, RMBdenominated financial assets, including onshore stocks, bonds, loans and deposits, held by foreign entities increased to 10.2 trillion yuan ($1.6 trillion), up 42.8 per cent from a year earlier, the central bank disclosed in the report.
“With vaccinations available in 2021, albeit at variable pace and degrees of success, sovereign investors have focused on emerging markets in the AsiaPacific region and China, in particular”, said Terry Pan, CEO in China, Southeast Asia and Korea, Invesco.
Sovereign investors’ intentions to increase allocations in China over the next 12 months are not surprising, and have been a trend over the past four years. Sovereign investors expect to increase allocations in China both with new capital and by withdrawing from North American and European allocations, which together comprise the bulk of sovereign portfolios, Pan said.
“Though China faces various challenges, it is still a huge driver for overall global growth.”
Sovereign investors usually include global sovereign wealth funds and central banks.
In fact, the PBoC will continually promote high-quality and two-way opening up of the financial market, enriching risk-hedging tools and facilitating overseas entities’ allocation of RMB-denominated financial assets, said officials from the PBoC macro-prudential management bureau and its monetary policy department.
Innovative moves to promote RMB cross-border investment will focus on free trade zones, the Guangdong-Hong KongMacao Greater Bay Area and Shanghai international financial centre, officials said on condition of anonymity.
Zhang Ming, deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said that providing more yuan-denominated financial products with greater liquidity for foreign investors could be an effective way to accelerate the process of RMB internationalisation.
The government can launch more pilot programmes in free trade zones to encourage innovative practices. In addition, promoting domestic enterprises to make direct investment in regions of the Belt and Road Initiative can promote the use of the RMB, said Zhang.
The PBoC’s research indicated that by 2020, RMB crossborder receipts and payments accounted for 46.2 per cent of the total cross-border transactions, hitting a new high. In the first six months of this year, RMB cross-border receipts and payments totalled 17.5 trillion yuan, and the share increased to 48.2 per cent.
Given the apparent strong performance of the Chinese currency, the offshore RMB bond market has seemingly continued to recover this year, which sources say was also driven by more stable interest rates in China compared with other economies.
The strong demand for RMBdenominated assets and the expected lower financing cost based on asset swaps, will also support the strong performance in the offshore bond market, according to Kelvin Lau, a senior economist with Standard Chartered in Hong Kong.
PBoC officials also expected cross-border usage of RMB to be further driven by international trade of goods and services. The signing of the Regional Comprehensive Economic Partnership (RCEP) will further promote the development of trade in the Asia-Pacific region and expand the use of the RMB in trade and investment activities, they said.
RMB settlement in commodities trading is expected to remain as a key driving force for cross-border use of the yuan. Cross-border e-commerce will increase the scenarios of RMB use in foreign trade, the central bank added.
Lau said the central government has adopted a more accommodative policy, by cutting 50 basis points of banks’ reserve requirement ratio (RRR) in July, which would facilitate the expectation of further policy easing.
Lau predicted another RRR cut of 50 basis points in the fourth quarter, with more proactive fiscal measures, which he said will be positive for China’s economic growth as well as the domestic stock and bond markets.