Implications of renminbi liberalisation for corporates

Renminbi liberalisation is gathering pace after China’s easing of restrictions on foreign access to the interbank bond market. What should corporates make of this development?
Lisa Robins of J.P. Morgan
Lisa Robins of J.P. Morgan

The liberalisation of the renminbi took another small but significant step in mid-August when restrictions on foreign lenders’ investments in mainland China’s interbank bond market were eased. This is the fourth development affecting the currency in the past three months and comes only four weeks after the liberalisation of renminbi transactions in Hong Kong.

FinanceAsia talks to Lisa Robins, J.P. Morgan’s head of treasury & securities services for China, for an assessment of how this development will affect companies doing business with the mainland.

What do the new regulations regarding greater foreign access to China’s interbank bond market entail? Who will be allowed to participate?
Before the People’s Bank of China announced these most recent updates to the trade settlement pilot, a key issue facing companies and financial institutions outside of China was the limited opportunity to place their renminbi holdings.

Now that foreign central banks, renminbi clearing banks in Hong Kong and Macau, and overseas participating banks that conduct international trade settlement in renminbi will be able to use some of their renminbi funds held offshore to invest in China’s interbank bond market, we anticipate that there may be a significant pickup in interest in the recently-expanded renminbi international trade settlement program. As such, this partial opening up of China’s debt markets is another important step in the road towards a more international currency.

What are the implications for corporate treasury operations?
We would expect to see an increase in the number of corporates seeking to settle trades in renminbi. Now that there is a viable channel for qualified overseas banks to put their renminbi holdings to use by investing in government and corporate debt, we would anticipate that more overseas banks and corporates would be willing to participate in the renminbi international settlement program.

Banks outside of China may also see increasing demand from their corporate clients who are seeking renminbi-denominated investment products. The interbank bond market will allow banks to access more renminbi liquidity and potentially generate a higher yield on their renminbi holdings.

Eventually, we expect to see a positive cycle of corporates and banks using and holding more renminbi outside of China. However, given that the pilot scheme will at the outset introduce quotas on financial institutions, we expect the impact on the interbank bond market to be fairly limited.

How far will this development go towards seeing the renminbi used as a reserve currency? What else needs to be done before this is realised?
Before the renminbi can become a reserve currency the capital account also needs to be convertible. This development may be a step towards further convertibility -- however, there are still many things that will need to occur before the renminbi becomes a reserve currency. There have been a number of moves recently, including the replacement of the peg to the dollar by referencing to a basket of currencies. Broadly speaking, we need to see further investment options available for the renminbi and avenues which give corporates a wider choice when it comes to hedging their risk.

In the longer term, how would use of the renminbi as a possible new reserve currency affect corporates and their treasury operations outside of China?
The renminbi will be another currency in their toolkit and they will probably want to work with banks that have an understanding of the Chinese market. Nonetheless, at this stage, we do not expect to see a fundamental restructuring of the way corporates and their treasury centres do business.

However, for those corporates that will use renminbi as a currency for their operations in the future, foreign exchange risk management and mitigation will obviously be key. Corporates are going to need platforms to better match payables and receivables, therefore minimising the FX risks and costs associated with potential currency mismatches.  

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