China is succeeding in speeding up renminbi internationalisation across Europe but the pace may not be as fast as in Asia, where the currency is rapidly winning over markets.
After a long-time in the making, the People’s Bank of China (PBoC) last week appointed China Construction Bank and Bank of China as renminbi clearing banks in London and Frankfurt respectively – the first outside Asia.
One day later, China’s central bank mandated a first batch of market-makers for direct trading between renminbi and the British pound on the interbank foreign exchange market. At least five banks, including Bank of Communications, Citic Bank, Deutsche Bank, HSBC and Standard Chartered, were enlisted.
These moves are most definitely exciting for the renminbi market.
Only Asian markets have clearing banks in the offshore market so far. Bank of China is the clearing bank for the currency in Hong Kong, Macau and Taipei, while the mandate in Singapore went to ICBC.
But the new moves will allow European clearing banks to efficiently process renminbi transactions outside of the Asian timezone and boost transaction settlement within Europe as well as into China, according to analysts.
“Having market makers quote the currency directly can contribute to the greater globalisation of the renminbi and encourage more transparency in settling the currency,” said Beng Hong Lee, head of China markets at Deutsche Bank in Shanghai, on the appointment of market-makers between renminbi and the pound.
The London renminbi market
London has for years made efforts to become a leading offshore renminbi hub and its attempts finally paid off in 2013.
The city received a Rmb80 billion ($13 billion) quota under China’s renminbi qualified foreign institutional investor (RQFII) programme, enabling foreign renminbi holders to directly invest in mainland China.
Meanwhile, London accounted for 62% of global renminbi trading outside mainland China and Hong Kong as of October 2013. Also, the total amount of renminbi-denominated trade financing was nearly Rmb43 billion, a 10% increase on 2012, according to a research report by the City of London Corporation (CLC).
However, renminbi deposits are taking their time to build in the financial centre. The aggregate level of deposits stabilised around Rmb14 billion in 2013, up 23% from the end of 2012, according to the CLC. But compared to the other offshore renminbi markets such as Hong Kong, Taiwan and Singapore, the total deposits are relatively small.
The renminbi-denominated deposit balance of Taiwan's financial institutions totaled Rmb214.5 billion in January — the market began taking renminbi deposits in early 2013. Hong Kong’s deposit balance, meanwhile, amounted to Rmb920 billion in April and Singapore’s Rmb200 billion as of last December.
“The size partly reflects the relative newness of the market in London but also suggests the pattern of deposits when the currency is held as an asset class in a market with a relatively small number of participants,” said a Hong Kong-based analyst with a foreign commercial bank.
The small size of renminbi deposits may also limit the currency’s liquidity pool in the city and harm further development of renminbi investments. For example, London’s potential has yet to develop in renminbi bonds. Only three financial institutions have tapped the renminbi bond market in London till now.
London also faces intense competition from Asian centres and European hubs in developing into a renminbi investment hub attracting fund managers, particularly Luxembourg, which holds Rmb220 billion in renminbi funds.
Compared to the rapid take-up in Asia, the adoption in Europe may need more time to take root.
China’s story is more complex now. Its growth has slowed and the reformists in the leadership have to tackle more headaches than merely economic issues, as its reform policies have had a hard time being implemented.
Some renminbi-related reforms seem to have stalled. The Shanghai Pilot Free Trade Zone did not put forward new policies to further liberalise renminbi cross-border accounts as expected.
Meanwhile, the recent decision by global index MSCI not to admit China A-shares to its global emerging-market indices shows global renminbi ambitions may not be accepted by investors so soon.
“In February the offshore renminbi market for the first time in years had a decreasing value relative to other currencies, which added some turbulence to the market,” said the Hong Kong analyst.
Furthermore, the dim sum bond market is a “buy-and-hold” market, which means the market has low liquidity in secondary market trading.
Other issues include difficulty in finding hedging instruments, a lack of development of the repo market, and also the fact the market is still government-driven.
As for equity products, only one renminbi-denominated Reit and two share placements have listed in Hong Kong. Renminbi IPOs still haven’t come to the market yet.
Therefore, the recent progress in Europe, a newly developed offshore market that has fewer cultural and historical ties with China compared to Asian markets, will still need time to catch up.
That said, bank executives still have confidence in the market. “I think we will see increasing penetration of renminbi usage by corporate clients, more investment in the currency in London and continental Europe, as well as more innovative products brought to market,” said Deutsche’s Lee.