Investors need certainty
“Asset managers want certainty when they invest,” Eugenie Shen, Asia Securities Industry & Financial Markets Association MD said. “They want to know they can repatriate or remit funds out of China whenever they want to.”
While China has been proactive in opening up markets, investors are wary given how ‘gates’ have been closed for corporate repatriation in the past. Recent permission for bond investors to access the onshore foreign exchange market is another hurdle jumped.
But access is far from harmonious. The muddled series of programs can be confusing and may penalise early movers. The whole access regime needs an overhaul before investors will truly embrace Chinese bonds and equities.
There is no doubt China’s financial markets are an enormous opportunity -particularly the rapidly liberalising China Interbank Bond Market (CIBM) - but the platforms in now are still uncertain.
Global clearing infrastructure
The world now operates 23 offshore RMB clearing hubs and each has taken their own approach. In Australia the ASX’s Austraclear system funnels RMB payments through to the onshore clearing system in China.
Other hubs have the choice of using a traditional correspondent banking model, a clearing bank model (where an offshore bank connects to the official offshore RMB clearing bank in that hub which in turn connects to an onshore clearing bank) or more recently, a model which allows connectivity to China’s Cross-border Interbank Payment System (CIPS).
A challenge for the future will be how these hubs can better connect to leverage global liquidity. Extending trading hours for CIPS would be a positive start.
Growth in the use of RMB offshore requires a freer flow of RMB out of China. The hubs are in place and will need to work more closely in the future. Offshore liquidity will continue to struggle while the gates remain locked.
China boasts the largest internet-financing community in the world, worth over $US1.8 trillion. As China marches towards a more consumption-led economy, the opportunity to tap into China’s domestic ecommerce growth is astounding.
During China’s recent Lunar New Year, 46 billion digital red packets (or “hóngbāo”) were sent by WeChat users instead of in physical form. Foreign businesses have immense opportunity to use RMB to tap into the large consumer spending which comes off the back of holidays such as the annual Lunar New Year.
Another interesting topic of discussion was the PBoC recent commentary around the RMB as a potential cryptocurrency. According to media commentary this would “…revolutionise the cryptocurrency universe and skyrocket its popularity and acceptability worldwide”.
“China is a major importer and exporter of goods and services. A digital Renminbi can be a gateway for China to internationalize its currency, and offer it as a substitute to the US dollar.”
In may well be in the PBoC’s interest to offer the RMB as a pseudo-cryptocurrency, particularly given the inherent challenges of controlling Bitcoin – although it would clearly prefer to control the risks and this is a clear motivation in their thoughts.
Earlier in the year, more than 90 per cent of daily trading in Bitcoin was being made in RMB, however this has fallen significantly recently given PBoC initiatives. It does paint a picture of what the future could look like if the RMB went down the digital path.