Cash Management
Renminbi - a new market opportunity
The RMB as a major reserve currency may still be some years away, but it is increasingly making its presence felt in global trade and among sovereign wealth funds. John Gubert reports.
Sibos Toronto 2011
If you ask anyone in Asia to choose their two or three major issues across the region, internationalisation of the renminbi (“RMB”) is likely to be among them. There are several sessions on this topic at Sibos. Neil Daswani, regional head of North Asia Transaction Banking at Standard Chartered, is certain the policy of internationalisation will work and lead to major change in the international financial market structure.
The current policy is aimed at creating a currency for trade and also a store of value. The former will be the major driver for liquidity; the latter will enable broader RMB- based investments.
The first step, the transfer of the trade to RMB, has been remarkably successful. In Q1 2010 just 0.4% of all trade was denominated in the currency; now the figure has increased to just over 10%. Standard Chartered believes its forecast of 15% to20% of all trade being so denominated within three to four years may well prove conservative. The big driver for the move to RMB denomination of trade flows has been in imports to the Chinese mainland and especially those sourced from Hong Kong and Singapore. But it is expected that the geographic reach of this activity will increase, especially as now more than 67,000 exporters are in the scheme.
The volumes are important for we need to remember that the total value of Chinese trade with the outside world is some USD2.9 trillion per annum and thus the current coverage means that we have around USD 300 billion of annual activity. That is a strong driver for liquidity and places RMB payments just outside the top 20 currencies of the world. And that has occurred in less than two years.
There is still much room for further growth. Logically the RMB should be a strong top 10 global payment currency. China RMB foreign exchange volumes account for 0.9% of local GDP according to a recent SWIFT white paper; well below the global average.
So what does this mean to investors? We are maybe still a good few years away from the RMB becoming a core reserve currency, but its inclusion in global sovereign wealth funds (perhaps seeing it as an inevitable winner against the dollar even though a major revaluation appears remote) is possible with the emergence of the Dim Sun market. Again, the investment space is just emerging and so figures are small by global comparison. But, they are still meaningful. Issues are mainly in the two-to-five-year maturity range and from sovereign or quasi sovereign issuers. When one adds this nascent bond market to the emerging foreign exchange capabilities, in forwards as well as spot, and a reasonable interbank deposit market, we can see the nucleus of a new market opportunity beyond the current carefully controlled volume of flows in and out of China under the different portfolio investment schemes.
The major Chinese domestic banks and the powerful Hong Kong-based international ones are keenly targeting this market. We are seeing the emergence of a powerful new set of products in financial markets. Banks will need patience and stamina, for the market will take time to evolve. But, as we move to a multi-polar world, it is a safe bet that one of the key investment currencies of the future will be the RMB.
Date Posted:20th September 2011