Belt & Road, US & certainty key for RMB

Australia’s Reserve Bank governor Philip Lowe made a telling comment at the inaugural RMB Global Cities Dialogue event in April when he said while many countries have liberalised capital accounts and made exchange rates more flexible, “few, if any, have done so without causing at least some disruption to their domestic financial system”.

The globalisation of the Chinese currency is an example of this tension between risk and opportunity. In the first half of calendar 2017 the path to globalisation has zigged and zagged, leaving businesses and investors wondering what’s next.

" The globalisation of the Chinese currency is an example of this tension between risk and opportunity.” -Daniel Everett, Global Head of RMB, Strategy & Execution, ANZ

One answer is China’s Belt and Road initiative. It’s not the only route and other considerations are crucial. But it is likely to be a major one. Stability is the key priority for China at this time given it is dealing with a raft of challenges in certain sectors and slower growth than experienced over the previous decade.

The event was held before Moody’s Investors Service downgraded China’s credit rating by one notch, citing concerns around rising debt and economic growth. Since the announcement of the downgrade, the RMB has traded lower against the $US.

So with all of this in mind, what did the RMB GCD discuss and what themes emerged?

BRI could help RMB

The BRI - previously referred to as the ‘One-Belt, One-Road’ policy - is a push by China to promote economic development along parts of the Pacific, Asia, Africa, the Middle East and Europe. The reach of BRI continues to extend to new regions including Australia.

To date, BRI projects have largely been funded in $US, more as a sign of its incumbency for such projects. In recent commentary People’s Bank of China Governor Zhou Xiaochuan indicated a greater use of other currencies as part of the BRI could benefit the RMB.

Such an ambitious investment agenda, coupled with China’s appetite for foreign investment could see international use of RMB for approved projects jump over the coming years.

There are clearly challenges which need to be overcome. Many BRI countries are sub-investment grade and some lack the critical mass or a visible pipeline of work to justify the deployment of expertise there.

In his keynote address Dr Lowe maintained his bullish sentiment explaining “…it is likely the internationalisation of the RMB will be one of the biggest forces shaping the global financial system over the next decade or so.”

He also addressed the recent tightening of capital controls which he said can “…arguably have a positive effect on financial stability in China by reducing the risk of a disorderly currency adjustment and pressures in Chinese financial markets.”

“But there is a balance to be struck here, as tightening up controls runs counter to the longer-run goal.”

US an important cog

The US took its time to become a RMB clearing centre and is now only coming to terms with how it will link is immense corporate network to opportunities with the RMB.

“Development of the US RMB hub was very much a market-driven initiative,” Alison Fletcher from the US RMB Working Group told the GCD. “The US wanted to ensure its domestic corporates and investors were not disadvantaged in dealings with their Chinese counterparts because of a lack of infrastructure or knowledge to support using RMB.”

“The United States aims to grow the overall offshore liquidity pie, rather than take market share from existing large centres such as Hong Kong, Singapore and London.”

A liquid US hub will benefit other offshore hubs significantly.  Currently, offshore liquidity can be patchy as a result of less RMB trade usage and lower capital outflows as China restricts speculative RMB movement.

Vincent Lee, Executive Director at the Hong Kong Monetary Authority, said Hong Kong is not a monopoly for RMB and it is important RMB grows everywhere, including in the US.

The US and China are each other’s largest trading partner. According to Bloomberg, total two-way trade between the two countries was approximately $US600 billion in 2016.

In addition, the US investor community is in excess of $US30 trillion and China currently supports the world’s third-largest bond market ($US9.4 trillion) and the second largest equity market ($US6.8 trillion).

With such a large trade relationship and an investor community in the US matched by large capital markets in China the role the US has to play becomes very clear and an incredibly exciting proposition for the future.

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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.

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The RMB has come a long way but still has a long way to go. China’s regulatory landscape in particular has not provided the confidence for more widespread use and the RMB currently lacks credibility as a true alternative currency.

We should not forget though the RMB has really only been on this journey for less than a decade so perhaps we expect too much too soon.

Although the road has been bumpy and may continue to be so as the RMB wagon meanders down the internationalisation path, China is unmoved in its bid to have the RMB one day being a fully functioning floating currency which competes with the $US for volume. How it gets there and how long this process takes is still is very difficult to predict. 

Daniel Everett is Global Head of RMB, Strategy and Execution at ANZ

Sydney hosted the first ever RMB Global Cities Dialogue in April, bringing together a number of the offshore clearing centres to discuss the current challenges and areas of opportunity to further promote global use of RMB. 

The event was attended by 190 delegates representing more than 15 countries and had key note addresses from The Honourable Gladys Berejiklian (Premier of NSW), Dr Fan Yifei (Deputy Governor of the People’s Bank of China) and Dr Philip Lowe (Governor of the Reserve Bank of Australia). ANZ was a Gold Sponsor of this important Dialogue.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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