RMBI regaining mo­men­tum

Kuwait Times - - BUSINESS - By He­len Wong Note: He­len Wong is Chief Ex­ec­u­tive, Greater China, The Hongkong and Shang­hai Bank­ing Cor­po­ra­tion Lim­ited

Ren­minbi in­ter­na­tion­al­iza­tion seemed to have slowed in the past year, but be­hind the scenes China con­tin­ues to en­hance its fi­nan­cial in­fra­struc­ture so as to in­crease the global us­age of the ren­minbi. The cross-bor­der use of the Chi­nese cur­rency de­creased sig­nif­i­cantly in 2016. Ac­cord­ing to SWIFT, a net­work that banks around the world use to send and re­ceive money, the value of in­ter­na­tional ren­minbi pay­ments fell by nearly 30 per­cent, and the ren­minbi is now the sev­enth-most ac­tive pay­ments cur­rency1 (it be­gan 2016 in fifth-place)2.

Off­shore ren­minbi de­posits tell a sim­i­lar story. The stock of ren­minbi de­posits out­side main­land China has been shrink­ing since the be­gin­ning of 2015.3 Ren­minbi de­posits in Hong Kong, the world’s largest off­shore ren­minbi hub, to­taled RMB 528 bil­lion at the end of April 4 nearly 50 per­cent less than the peak of over RMB 1 tril­lion that were parked in Hong Kong at the end of 2014.5 The de­cline in the us­ing and hold­ing of ren­minbi was not un­re­lated to con­cerns over China’s eco­nomic slow­down, the ren­minbi’s de­pre­ci­a­tion, and the tight­en­ing of cross-bor­der cap­i­tal flow reg­u­la­tions. Yet against this back­drop, China ploughed ahead with ren­minbi in­ter­na­tion­al­iza­tion, widen­ing the range of domestic as­sets that for­eign in­vestors can buy and sell.

First, there is China’s stock mar­ket. An­nounced last Au­gust6 and launched within four months,7 the Shen­zhen-Hong Kong Stock Con­nect al­lows in­ter­na­tional in­vestors to trade the shares of smaller, more en­tre­pre­neur­ial com­pa­nies, whose growth is a crit­i­cal com­po­nent of China’s eco­nomic re­form. Via Hong Kong, in­vestors around the world now have di­rect ac­cess to most of the listed com­pa­nies that are traded on the main­land - an op­por­tu­nity that was unavail­able only three years ago.

Bond mar­ket

Then, there is China’s bond mar­ket. Last month8 China an­nounced the es­tab­lish­ment of Bond Con­nect, a trad­ing link that will con­nect China’s bond mar­ket with the world. The for­mal launch of this lat­est break­through in the de­vel­op­ment of China’s bond mar­ket looks cer­tain to be the next mile­stone in the open­ing-up of China’s cap­i­tal mar­kets.

China’s rapidly ex­pand­ing bond mar­ket is the world’s third-largest,9 but for­eign par­tic­i­pa­tion has been lim­ited: in­ter­na­tional in­vestors own less than 2 per­cent of China’s gov­ern­ment bond mar­ket, com­pared to 10 per­cent in Ja­pan, over 25 per­cent in the UK, and nearly 50 per­cent in the US. The grad­ual open­ing-up of China’s bond mar­ket will of­fer abun­dant op­por­tu­ni­ties to is­suers, in­vestors, and all the in­ter­me­di­aries in be­tween.

The three Con­nect schemes - Bond Con­nect, Shen­zhen Con­nect, and the Shang­hai Con­nect that launched in 2014 - not only made the in­clu­sion of main­land Chi­nese bonds and stocks in global in­dices a re­al­ity. (On 20 June 2017, MSCI an­nounced that it would in­clude A shares in its Emerg­ing Mar­kets In­dex.) They also serve as testimony that ren­minbi in­ter­na­tion­al­iza­tion is a medium-to-longterm strat­egy, a view that was most re­cently re­it­er­ated by the Peo­ple’s Bank of China in March. De­spite the de­crease in the cross-bor­der use of the ren­minbi in 2016, the fact re­mains that China is com­mit­ted to im­ple­ment­ing for­eignex­change and fi­nan­cial re­forms; open­ing up China’s econ­omy and fi­nan­cial mar­kets; and pro­mot­ing the ren­minbi as an in­ter­na­tional cur­rency. The off­shore ren­minbi mar­ket may be fac­ing short-term chal­lenges - trade set­tle­ment has slowed down and de­posits have shrunk - but it re­mains strate­gi­cally im­por­tant. Launch­ing cross-bor­der in­vest­ment schemes such as Bond Con­nect will im­prove the breadth, depth and health of the off­shore ren­minbi mar­ket, at the same time pro­vid­ing re­newed mo­men­tum to ren­minbi in­ter­na­tion­al­iza­tion.

An­other cat­a­lyst comes in the form of the Belt and Road Ini­tia­tive (BRI). An un­der­ly­ing force be­hind ren­minbi in­ter­na­tion­al­i­sa­tion has been China’s grow­ing trade - and its set­tle­ment in ren­minbi. Con­sid­er­ing that China’s trade with Belt-and-Road coun­tries out­per­formed its over­all trade in 2016,12 BRI, by im­prov­ing in­tra- and in­ter-re­gional con­nec­tiv­ity, will in the long run boost trade along the Belt and Road as well as the use of the ren­minbi as a trade cur­rency.

More im­por­tantly, BRI will in­crease the use of the ren­minbi for fi­nanc­ing. Spurred on by the gov­ern­ment, Chi­nese com­pa­nies are ac­tively par­tic­i­pat­ing in BRI pro­jects. By op­er­at­ing in coun­tries that are host­ing BRI pro­jects, these com­pa­nies with their ren­minbi-de­nom­i­nated bal­ance sheets will in­crease the lo­cal pools of ren­minbi liq­uid­ity. Be­cause the coun­tries that are host­ing BRI pro­jects con­sis­tently face liq­uid­ity short­ages in all cur­ren­cies - and be­cause mul­ti­lat­eral fi­nan­cial in­sti­tu­tions may not be able to pro­vide suf­fi­cient fund­ing - ren­minbi has a com­pet­i­tive ad­van­tage as a fi­nanc­ing cur­rency. There­fore, by in­creas­ing the pool of off­shore ren­minbi liq­uid­ity as well as the de­mand for ren­minbi-de­nom­i­nated bond is­suance, the Chi­nese cur­rency will be­come more ap­peal­ing as a store of value. Fur­ther­more, BRI-re­lated in­fra­struc­ture con­struc­tion pro­jects will in­crease the de­mand for ren­minbi hedg­ing. Com­bined with the open­ing-up of China’s on­shore bond mar­ket, the cross-bor­der use of the ren­minbi will in­crease.

Ren­minbi in­ter­na­tion­al­iza­tion may have slowed in the past year, but China has con­tin­ued to open up its cap­i­tal mar­kets. Fur­ther­more, over time the Belt and Road Ini­tia­tive will in­crease the use of the ren­minbi both as a trade and fi­nanc­ing cur­rency. Ren­minbi in­ter­na­tion­al­iza­tion is regaining mo­men­tum.

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.