Fo­rum founder con­fi­dent about yuan

Ex­pert says it’s just a mat­ter of time be­fore the ren­minbi joins the ranks of prom­i­nent world re­serve cur­ren­cies, Ce­cily Liu re­ports.

China Daily (Canada) - - EXPATS -

China’s fi­nan­cial mar­ket re­form is on track to push the ren­minbi to­ward re­serve cur­rency sta­tus with the In­ter­na­tional Mon­e­tary Fund, but more work is needed to open up China’s debt mar­ket for for­eign bond is­suers, said David Marsh, man­ag­ing di­rec­tor and co-founder of the Of­fi­cial Mon­e­tary and Fi­nan­cial In­sti­tu­tions Fo­rum.

Al­though the ren­minbi is in­creas­ingly be­ing used over­seas by com­pa­nies that is­sue off­shore bonds, the dif­fi­cul­ties for­eign is­suers of bonds face in tap­ping into China’s do­mes­tic debt mar­ket will limit the cur­rency’s broader in­ter­na­tional use, he said.

“Con­di­tions (for a re­serve cur­rency) are that you need to open up cap­i­tal mar­kets and al­low for­eign in­vestors, par­tic­u­larly cen­tral banks, to is­sue ren­minbi-de­nom­i­nated bonds be­cause they are rep­utable bor­row­ers.”

The in­creas­ing is­suance of ren­minbi debt over­seas will help the cur­rency to build off­shore liq­uid­ity, and the ren­minbi’s ac­count­abil­ity in over­seas cap­i­tal mar­ket will also grow. “So I fore­see this process to take place over the next 20 years, to make the ren­minbi more liq­uid and pre­dictable,” Marsh said.

The ren­minbi has stepped into the in­ter­na­tional fi­nan­cial mar­ket spot­light be­cause the IMF is due to make a judg­ment on whether to in­clude it in its bas­ket of spe­cial draw­ing rights by the end of this month, mean­ing gov­ern­ments that hold SDR cur­ren­cies in their na­tional re­serves would need to in­crease their al­lo­ca­tion of ren­minbi.

The SDR bas­ket of re­serve cur­ren­cies is held by many IMF mem­ber coun­tries’ cen­tral banks. Cur­rently, those cur­ren­cies are the dol­lar, euro, ster­ling and yen.

If suc­cess­ful, the SDR push would be a big step for the ren­minbi to­ward re­serve sta­tus. “I think there will be a de­ci­sion to say yes in prin­ci­pal,” Marsh said. China’s ex­change rate will be­come more free than at the mo­ment, al­though the author­ity will main­tain a steady hand on its fi­nan­cial sys­tem, so there will be an el­e­ment of con­trol.”

He said po­ten­tial SDR in­clu­sion would give China a greater in­cen­tive to speed up its cap­i­tal ac­count re­forms and ex­change rate lib­er­al­iza­tion, but he be­lieves China is jus­ti­fied in open­ing up its mar­kets grad­u­ally, “like a sluice gate”.

“China could keep a rel­a­tively con­trolled sys­tem, mean­ing as much con­trol as nec­es­sary and as much lib­er­al­iza­tion as pos­si­ble. The Chi­nese gov­ern­ment will re­main in con­trol, and they have the right to reim­pose con­trol (if the mar­ket re­sponds un­ex­pect­edly to fast­paced open­ing-up),” Marsh said.

What must be re­mem­bered is that the open­ing-up of China’s ex­change rate is al­ready very fast paced, and just as Bri­tain had ex­change rate con­trols un­til 1979 and many Euro­pean coun­tries did so un­til the 1990s, so China should take its time to lib­er­al­ize, he said.

Tra­di­tion­ally, the ren­minbi was pegged to the dol­lar in or­der for China’s do­mes­tic and ex­port mar­ket to main­tain sta­bil­ity, and re­stric­tions for both the in­flow and out­flow of ren­minbi were a part of this ex­change rate con­trol strat­egy.

This all changed af­ter the 2008 fi­nan­cial cri­sis, when the Chi­nese gov­ern­ment re­al­ized the dan­ger of the world re­ly­ing too heav­ily on the dol­lar as a dom­i­nant re­serve cur­rency. In re­sponse, the gov­ern­ment started the ren­minbi’s in­ter­na­tion­al­iza­tion process and lib­er­al­ized its cap­i­tal ac­count con­trols to al­low the ren­minbi’s ex­change to be set in a more free-mar­ket way.

Con­se­quently, use of the ren­minbi over­seas grew, and one key phe­nom­e­non was the growth of ren­minbi-de­nom­i­nated bonds be­ing is­sued in over­seas fi­nan­cial mar­kets.

Ac­cord­ing to es­ti­mates by Ben Yuen Cheuk Bun, man­ag­ing di­rec­tor and head of fixed in­come at Bank of China Hong Kong As­set Man­age­ment, to­tal off­shore ren­minbi bond is­suance this year is likely to be around 300 bil­lion yuan ($47 bil­lion).

In com­par­i­son, ac­cord­ing to one es­ti­mate by the World Bank’s In­ter­na­tional Fi­nance Corp, for­eign com­pa­nies’ is­suance of China’s on­shore ren­minbi bonds, known as panda bonds, could ex­ceed $50 bil­lion in the next five years.

But Marsh said this debt mar­ket has great po­ten­tial to grow if bond is­suers are al­lowed ac­cess to China’s on­shore debt mar­ket, which is far larger and more liq­uid.

For this to hap­pen, China needs to in­tro­duce rules to al­low for­eign is­suers ac­cess to its panda bond mar­ket. This mar­ket is ex­pected to help bonds ob­tain more se­nior sta­tus and also bring down the costs of bor­row­ing, so it would make sense for com­pa­nies to is­sue bonds on a large scale, he said.

“We need more rou­tine is­suance of ren­minbi bonds. If China is a large for­eign cred­i­tor, it would like to hold claims de­nom­i­nated in its own cur­rency,” said Marsh, ex­plain­ing that de­nom­i­nat­ing the debt in ren­minbi would al­low Chi­nese cred­i­tors to elim­i­nate ex­change risks and costs.

He said some peo­ple mis­tak­enly be­lieve that a coun­try with a cur­rent ac­count sur­plus would never have a re­serve cur­rency, which comes with a cur­rent ac­count deficit, but this is not true be­cause a cur­rent ac­count sur­plus coun­try like China can have a re­serve cur­rency as long as it main­tains an open cap­i­tal mar­ket to in­ter­na­tional in­vestors.

China over the years has built up a large cur­rent ac­count sur­plus, mean­ing it ex­ports more prod­ucts to trade part­ners than it im­ports from them, and con­se­quently ac­cu­mu­lates more for­eign cap­i­tal in its re­serves than it sends out in ren­minbi to other coun­tries.

Marsh said that over the long term, Chi­nese in­vestors will be able to lend more through ren­minbi-de­nom­i­nated bonds by demon­strat­ing to the mar­ket that the ap­petite for ren­min­bide­nom­i­nated bonds is larger than bonds de­nom­i­nated in other cur­ren­cies.

“It is a process of mar­ket sup­ply and de­mand. The bor­row­ers could say that their ap­petite is not so big for dol­laror euro- de­nom­i­nated bonds, but would rather pre­fer ren­minbi bonds.”

The other change that needs to hap­pen in China is a shift of men­tal­ity by Chi­nese pen­sion funds and so­cial se­cu­rity funds, to in­vest the large vol­ume of funds they hold in th­ese ren­minbi-de­nom­i­nated bonds, as op­posed to keep­ing it in cash, which they are cur­rently ac­cus­tomed to do­ing, he said.

In ad­di­tion to the fa­vor­able and at­trac­tive on­shore ren­minbi in­ter­est rates, he said Chi­nese banks also need to work on de­vel­op­ing an ef­fi­cient ren­minbi swap sys­tem so that com­pa­nies that do not need ren­minbi-de­nom­i­nated cap­i­tal can swap the pro­ceeds of their bonds into other cur­ren­cies.

Tra­di­tion­ally, com­pa­nies that is­sue ren­minbi-de­nom­i­nated bonds tend to be those that do busi­ness with China, like Volk­swa­gen and Cater­pil­lar, so that they can im­me­di­ately use their pro­ceeds for China-re­lated trans­ac­tions.

But to grow the mar­ket, the ren­minbi bonds must be at­trac­tive for bond is­suers who do not re­quire ren­minbi pro­ceeds, Marsh said.

Al­though the SDR in­clu­sion likely would have large sym­bolic sig­nif­i­cance, and in con­crete terms all IMF coun­tries would al­lo­cate a por­tion of their cur­rency re­serves to the ren­minbi, he said. It is only the be­gin­ning of a jour­ney be­cause build­ing up liq­uid­ity for the cor­po­rate use of ren­minbi is cru­cial for its re­serve sta­tus.

As of Septem­ber, the equiv­a­lent of about $280 bil­lion in spe­cial draw­ing rights are al­lo­cated to IMF mem­bers, com­pared with about $11.3 tril­lion in global re­serve as­sets. Ac­cord­ing to an es­ti­mate by Stan­dard Char­tered Plc and AXA In­vest­ment Man­agers, at least $1 tril­lion of global re­serves would mi­grate to Chi­nese as­sets if the yuan joins the IMF’s re­serve bas­ket.

But this is very small com­pared with the daily ex­change turnover of tril­lions of for­eign ex­changes, said Marsh. “So the in­sti­tu­tional shift by other in­vestors is more im­por­tant.”

If China is a large for­eign cred­i­tor, it would like to hold claims de­nom­i­nated in its own cur­rency.”

man­ag­ing di­rec­tor and co-founder of the Of­fi­cial Mon­e­tary and Fi­nan­cial In­sti­tu­tions Fo­rum

Con­tact the re­porter at ce­cily. liu@mail.chi­nadai­


David Marsh said China’s fi­nan­cial mar­ket re­form is on track to push the ren­minbi to­ward re­serve cur­rency sta­tus with the In­ter­na­tional Mon­e­tary Fund.

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