China is taking the appropriate steps to promote the renminbi as a reserve currency. But don’t expect it to happen overnight.
That’s the conclusion we reached after polling our readers about their thoughts on the internationalisation of the Chinese currency.
But there’s no question that what China has already achieved is nothing short of remarkable.
“As a leading economy, which accounts for 10% of global trade, China needs a currency benefitting that position,” said Tim Condon, chief Asia economist of ING Bank. “It is remarkable that the authorities promoted an offshore market in their own currency, an experiment with no historical precedent, in a period when global financial market volatility was at an all-time high.”
Click here to see the survey results.
Of the 276 respondents to our poll on the internationalisation of the renminbi, 57% were based in Hong Kong. They were comprised just about equally of investment bankers, commercial bankers, corporate executives and investors. Many of these respondents are literally hands-on in the efforts to internationalise the currency, which has been happening at a surprisingly fast pace.
“Although the rules are not yet clear, in terms of significant international projects undertaken by Chinese conglomerates who are heading abroad in ever-increasing numbers, we have already seen a move to utilise RMB debt funding offshore. This trend is encouraging, and going forward, this could lead to additional flexibility for both project sponsors and lenders,” said Yongmei Cai, international financial markets partner at Simmons & Simmons in Beijing.
“Were internationalisation to lead to capital account convertibility it would be the most significant pro-market economic reform since China acceded to the WTO in 2001. From what we have seen, I expect the RMB to become fully convertible in five to 10 years from 20 years as previously expected,” added Condon.
About 30% of our respondents agree with Condon, and say it will become freely convertible before 2020.
But not everyone is so bullish on the speed of change: 42% say it will take until at least 2025, 24% say it will take longer (sometime after 2025) and 6% say it simply never will happen.
But the bottom line is, it’s been a lightning fast transformation up until now. As Cai noted: “The acceleration of RMB liberalisation in the past several years is remarkable, particularly when viewed against the past three decades.
If this pace continues, and the erosion of obstacles to capital flows back to China, both equity and debt endures, we may well see China’s economy fully integrated with the global and regional economy in a decade.”
What exactly needs to happen?
Eighty percent of our respondents said that “restricted capital account flows” was the most significant factor holding back the renminbi from being considered freely convertible. Then, they selected a similar theme as the second most important factor: “slow capital account reform”. The third most pressing factor holding back the currency, said our readers, was concerns about China’s political system, which is not surprising given a leadership transition begins later this year. WHY IT MATTERS From investors’ perspective, the most important benefits of the renminbi internationalisation process is that it offers diversification of portfolios, followed by direct exposure to China and closer integration of Chinese capital with global capital markets.
It is not surprising that the number one listed benefit to companies is trade settlement in the currency, followed by more capital raising options and greater hedging opportunities. This is precisely what the market has been calling out for during the past few years.
And China has been delivering. Back in 2003 it authorised Hong Kong banks to offer renminbi deposit services, more recently in 2009 it launched the pilot renminbi trade settlement scheme. The ongoing announcement of bilateral renminbi swap agreements (currently with 14 trade partners) and the recent pilot schemes for inward and outward foreign direct investment and the expanded qualified foreign institutional investors scheme (increased to $80 billion from $30 billion in early April 2012) suggest that China intends to stay the course in its effort to create full capital account convertibility.
Jonathan Hammond, international head of financial markets at Simmons & Simmons in London, put it succinctly, “We have seen this coming for many years, and it now seems that the slow and steady drive to internationalise the renminbi has taken centre stage, and has become a cornerstone of Chinese financial market reform policy.”
What’s in it for me?
The key benefits for the banking industry would be more potential capital markets business, FX business and trade-finance business. “We see a host of opportunities with the internationalisation of the RMB,” said Hammond, “particularly for structured products and trade finance instruments that can be created and traded outside of China, and consequently unimpaired by still developing domestic regulatory policies.”
The expectation is that the capital markets growth will be steady — not the leaps and bounds explosion of 2011. Last year, dim sum bond issuance nearly tripled from $5.4 billion in 2010 to $14 billion. But most respondents (66%) expect the size of that market will be just between $15 billion and $20 billion by the end of the year, with 18% taking a more bullish view of $20 billion to $40 billion. The expectation is that it will gradually grow. (See chart on next page).
China has certainly been delivering on this front too. Consider that in late November Baosteel, a Chinese state-owned steelmaker, became the first mainland company to tap the dim sum market directly when it closed a Rmb3.6 billion ($564 million) offshore renminbi bond — the largest corporate dim sum issue to date. That deal paved the way for Chinese companies with renminbi capital funding needs, other than Chinese financial institutions, to tap into the offshore renminbi market.
Following the success of the listing of Baosteel’s renminbi bonds on the stock exchange of Hong Kong in February this year, the National Development and Reform Commission (NDRC) further gave the green light to four Chinese companies including Huaneng Power, China Datang, China Minmetals and China Guangdong Nuclear Power to issue renminbi bonds of a total amount not exceeding HK$18.5 billion in Hong Kong. All these developments have shown the Chinese government’s continuous support for the growth and expansion of the offshore bond market in Hong Kong.
That said, last year the total issuance for the offshore renminbi market (including certificate of deposits and dim sum bonds) was $26 billion. And our respondents said that it will stay in the $25 billion to $50 billion range for the next three years but grow to more than $50 billion by 2020. (See chart on next page). Specialists say this would be a good outcome because it would imply sure but steady growth.
Investors and CFOs alike are probably most interested in whether or not the renminbi will appreciate (or depreciate) this year. The view seems to be consistent: 69% of our respondents expect it will appreciate by roughly 3%.
Another 18% expect it will appreciate by 5% against the US dollar, as it did last year. Two percent say it will appreciate by more than 5%, but 11% forecast it will depreciate this year.
This is not far off analyst forecasts at the moment. “We currently forecast a moderate renminbi appreciation of 1% to 2% against the US dollar in 2012.
Fundamentally, we see little reason for the renminbi to continue the appreciation, with China’s shrinking current account surplus and the broad US dollar strength. However, considering the political agenda this year [the US presidential election and China’s change of leadership] and China’s goal for renminbi internationalisation, we believe the Chinese policymakers still want to let the renminbi appreciate albeit at a very moderate pace,” said Weisheng He, strategist for Asian rates and FX at Citi.
The stock option
Hui Xian Real Estate Investment Trust was the first entity to list renminbi-denominated equity units on the Hong Kong stock exchange last April. It was met with caution. And the consensus view remains conservative. Markets are slow, so 81% of those polled said that they expect to see fewer than five renminbi-denominated initial public offerings in Hong Kong this year.
Eighteen percent are optimistic and say five to 10 renminbi-denominated IPOs are on the cards for the year, and then two voters (1%) are expecting a flurry of IPOs — more than 10 to launch in the second half of this year. But bankers keep telling us their pipelines are full — and they must be: because 54% of the respondents expect between 10 and 20 renminbi-denominated IPOs by 2015 and 60% have that expectation for 2020.
Where in the world?
London, Singapore and New York are pushing their credentials as key trading centres for offshore renminbi. But our respondents — remember the bulk were in Hong Kong, so they could be a touch biased — aren’t sweating the competition. Fifty two percent of those polled said that less than five percent of the global offshore renminbi market will be handled by these three financial centres by 2012. It’s not until 2020 that our readers forecast a more significant chunk of the business will be handled elsewhere: that is when 48% of the respondents said that between 20% and 50% of the offshore renminbi market will be covered by London, Singapore and New York. “The deals show the trend, and last year, we acted for BP Capital Markets in its issue of Rmb700 million notes due 2014, the first London-listed renminbi issue by a multinational corporate. With this beginning, we expect to see steady growth in the London market for RMB deals — a natural offshoot of the growing market in Hong Kong,” said Hammond of Simmons & Simmons.
HSBC itself issued the first dim-sum bond in London on April 18 — hoping to create momentum in the city’s offshore renminbi market. Justin Chan, the bank’s deputy head of global markets for Asia-Pacific, noted the Rmb2 billion bond issue ended up being twice as large as initially expected, with strong demand among European investors who accounted for 60% of overall subscriptions.
HSBC is firmly of the view that London will be a key outpost in expanding the geographic reach of renminbi — playing a complementary rather than competitive role alongside Hong Kong in this regard. London has the advantage of being the world’s biggest offshore US dollar market and foreign exchange centre, with a relatively convenient timezone for both East and West.
But as of the end of 2011 renminbi deposits in Hong Kong stood at Rmb588 billion and now account for more than 10% of all deposits in Hong Kong, displacing other more traditional choices of foreign currency deposits such as the US dollar and euro. While our readers don’t expect a significant increase this year, they do forecast the money stores to grow.