“At that time, the cross-border RMB trade settlement scheme (in Hong Kong) was still a ‘pilot’ and only covered selected provinces in the Mainland,” he noted. “RMB trade settlement handled by banks in Hong Kong was only some RMB100 billion a month, which is less than one-fifth of the RMB600 billion registered in March this year.”
Meanwhile growth in the offshore RMB market in Hong Kong has been, in Sir Norman’s word, phenomenal: Hong Kong's RMB real time gross settlement system registered an average daily turnover of close to RMB700 billion in April this year, about 12 times that of three years ago.
“I also note that remarkable developments have been achieved in Australia, with recent data suggesting that Australia's RMB payments value increased by close to 2.5 times year on year,” he said.
This theme of growth and emergence on global markets was picked up by other speakers at the dialogue, notably Australian Treasury secretary Martin Parkinson and Reserve Bank deputy governor Philip Lowe.
But given China is now clearly Australia’s biggest trading partner and the lynch pin of an Asian economic century – Parkinson referred directly to the projections in ANZ insight 5, “Caged Tiger: The Transformation of the Asian Financial System” – perhaps the bigger surprise is the RMB is not more widely used and traded.
As David Olsson, China Practice Consultant at King & Wood Mallesons and a board member of the Australia-China Council, who chaired one of the dialogue sessions, reflects, the RMB is not even widely used for invoicing in direct trade between the two countries, let alone for more exotic products such as investment funds.
Some particularly revealing research papers were delivered at the dialogue highlighting the disparity between what is possible with the RMB even today and what is actually happening.
Australian National University associate professor Kathleen Walsh’s paper “RMB Trade Invoicing: Benefits, Impediments and Tipping Points” found both Australian and Chinese corporates were waiting for the other to initiate a change.
She found 70 per cent of Australian corporates surveyed were waiting for Chinese firms to request RMB invoicing and 76 per cent of Chinese corporates were waiting for Australians to accept it. As one Chinese corporate said: “Just because a new rule or policy suggests something has benefits, we all know that there may be hidden obstacles. So we wait … to see how others get through it first.”
Many corporates, both Chinese and Australian, indicated that Chinese government intervention was expected to initiate this change. Tentative change is coming and Walsh reported on some testing of the waters with small trades.
“However Australian corporates expect the request for settlement in RMB to come from their Chinese trading partners,” she wrote. “In contrast, awareness levels in China are relatively low, especially among small private firms, so the request may not be forthcoming. It would seem that raising awareness in China, especially highlighting the costs of hedging in a high volatility market, is necessary for the increased use of RMB in trade invoicing and settlement.”
This is a theme Sir Norman picked up on: “I think there is ample policy headroom for the offshore RMB markets to develop and flourish (but) it is not likely that a market can thrive just with policy headroom and financial infrastructure.”
“All these RMB related financial services and products can only be developed by the markets and financial institutions because they are closest to their customers and understand their needs best,” he said.
Invoicing though is only the most obvious of RMB opportunities.
With Australian and Chinese central banks now closer to an agreement which will see Sydney as the next official RMB trading hub, more infrastructure will be in place for support and liquidity for RMB trade. While RMB trades can already be cleared, the official status would provide the comfort of a central bank able to provide immediate liquidity if markets dry up.
Sydney would follow Hong Kong, Singapore and Taiwan as an official hub while the United Kingdom and Germany also recently signed memorandums of understanding with China to work toward London and Frankfurt becoming official hubs.
For one thing, official status tends to lead to increased RMB deposits – following Singapore’s nomination RMB deposits rose 70 per cent in nine months.
But this too is only part of the potential according to another paper presented “Internationalisation of the Renminbi: Pathways, Implications and Opportunities” co-authored by Walsh, Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley and Geoff Weir, Research Fellow at the Centre for International Finance & Regulation.
Echoing and amplifying many of the themes in Caged Tiger, this report found the RMB is likely to become a major trade invoicing and settlement currency with significant implications for growth in RMB trade-related foreign exchange turnover, in RMB hedging products and other derivatives and in RMB trade financing.
“Some countries and financial centres are likely to benefit more than others from these developments,” the paper found. “In Australia’s case, its very close trading ties with China, its funds management expertise, its natural endowments in sectors of strategic importance to China and its ongoing need for overseas capital to help fund investment all suggest considerable scope for building much closer and mutually beneficial financial ties between the two countries.”
The paper argues there are two areas where “significant opportunities” are likely to emerge: trade-related banking business and funds management.
The first opportunity includes invoicing but the second is particularly interesting as it draws on Australia’s established expertise in funds management together with the diversification possibilities when more investment funds are denominated in RMB and structured for both Australian and Chinese investors.
Malleson’s Olsson told BlueNotes this was one of the most engaged discussions at the dialogue.
Eichengreen, Walsh and Weir found however there were obstacles. “As (Chinese) capital controls are removed a significant and growing proportion of these (Chinese) savings are likely to be invested offshore,” they said.
“Some of this will be by way of investment mandates granted to offshore fund managers. While the Australian funds management sector has the skills, platforms and capacity to benefit from these developments, there is still considerable market uncertainty regarding the tax treatment in Australia of offshore investors investing through Australian domiciled investment vehicles. This needs to be addressed, by way of finalising legislation to put in place an effective Investment Manager Regime.”
Olsson spoke of a “tipping point” approaching with RMB internationalisation but this latest research – and indeed the feedback from the latest dialogue – is that not many corporates, fund managers, investors or policy makers appreciate how close it is.