Bankers see renminbi on rising road
Major global financial institutions on Thursday released a report that advocates and anticipates more open capital markets and increased global use of the yuan. The report, RMB Roadmap, was prepared by the Asia Securities Industry & Financial Markets Association, Standard Chartered Plc and Thomson Reuters Corp.
“China’s currency does not currently match its economic heft, and it needs to go through a five-step process for this evolution,” the report said.
First, as a deposit currency internationally; second, through increased use for trade; third, as an investment currency; fourth, through more bilateral swap agreements involving China; and fifth, global acceptance as a reserve currency, according to Mark Austen, chief executive officer of ASIFMA.
Many analysts consider the timing is right for the renminbi to take its place among the leading currencies of the world as China’s economy expands. But a combination of factors has slowed that process: a relatively closed capital account, underdeveloped domestic capital markets and relatively low use of the yuan in trade settlement.
Further opening of the capital account, expanded use of the yuan as an international investment currency and International Monetary Fund recognition of the renminbi as a potential reserve currency through Special Drawing Rights are all critical steps, the report said.
Carmen Ling, global head of renminbi solutions at Standard Chartered, said: “The building blocks for renminbi internationalization have stacked up well so far, and the ongoing efforts to further liberalize the currency are very encouraging.
“With a 2020 horizon, we think that China’s capital account should be ‘open’ by then, albeit with some Chinese characteristics. There should be greater and more seamless direct investment flows with global renminbi liquidity facilitating global cross-border trades and payments efficiently. We are optimistic about the Chinese leadership’s resolve to continue with this cautious but bold ambition,” Ling said.
The building blocks for renminbi internationalization have stacked up well so far, and the ongoing efforts to further liberalize the currency are very encouraging.” CARMEN LING GLOBAL HEAD OF RENMINBI SOLUTIONS AT STANDARD CHARTERED
“The offshore renminbi market was created explicitly to allow the currency to move toward internationalization, while the onshore market remains largely separate from the global market,” noted Adrian Gostick, who specializes in risk at Thomson Reuters China. “As capital controls ease, and linkages between the onshore and offshore markets grow, the convergence between these two markets is inevitable, albeit at a gradual pace.”
For example, as the dim sum bond market has evolved, spreads between dim sum bond yields and those of onshore bonds have narrowed since the dim sum market opened in July 2010. The average coupon on dim sum bonds has moved to 3.2 percent this year from 2.4 percent in 2010, while the average coupon on onshore bonds has fallen to 3.8 percent from 4.7 percent in 2010.
“Gradual onshore and offshore participation in the renminbi markets by global central banks and investors through the use of swap lines, the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor programs, the rapidly growing offshore or ‘dim sum’ bond markets and the rise of offshore renminbi centers – HongKong being the largest – have contributed to the first phase of the yuan’s internationalization, but there is still a long way to go,” said Patrick Pang, managing director of fixed income at ASIFMA.
“The recent announcement of the Shanghai-Hong Kong Stock Connect pilot program is a prime example of the evolving and exciting landscape,” Pang said.