The rise of the dim sum bond in recent years has understandably captivated market attention since the internationalisation of the renminbi – albeit seen as proceeding at a torturously slow pace, by some – will profoundly reshape global capital markets and monetary balances. However, for now, the offshore renminbi bond market does not offer a treasurer trove of riches for banks with RMB capabilities.
Instead, banks should set their sights on the more mundane and lower-profile work that goes alongside the process on renminbi internationalisation. Although much less appealing than the dim sum market, this is where real money can be made.
RMB internationalization will create additional markets that banks can sink their teeth in order to increase earnings. Below are five of them:
1. Trade flows
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There was no cross-border trade settlement in renminbis a few years ago; by March 2012 it had reached a cumulative Rmb3.17 trillion ($501 billion), according to Standard Chartered, which expects China to move from today’s 10% of world GNP to 24% by 2030. In the first quarter of 2012, cross-border trade settled in renminbis was Rmb580.4 billion; that’s a 61% year-on-year increase and yet still only equates to 10.7% of China’s total trade.
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On the cash management side, [RMB internationalization] affects everything: clearing and payments, liquidity management, deposits, access to China’s CNAPS national payment system, FX, advice on regulatory change, and integration of systems... "Renminbi liberalization is the single most important development that is going to shape the global banking landscape," says Frank Wu, head of trade finance and cash management for corporates in Greater China at Deutsche Bank. "In a matter of months the renminbi international clearing system infrastructure has started from zero to become widely available for a lot of the key trading partners of China. More and more customers have either started to convert their invoicing from dollars or euros to renminbis, or made direct inquiries to do so. This is going to be a key theme in the next five to eight years."
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3. Investment flows
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The QFII (qualified foreign institutional investors) scheme offers a mechanism for non-mainland institutions to invest renminbis in mainland Chinese securities, and quota in the programme has been carefully rationed. But in April the quota was increased from $30 billion to $80 billion. "In the last decade only $30 billion of QFII quota was allowed, cumulatively," says Jun Ma, Greater China economist at Deutsche Bank. "An increase of $50 billion in QFII quota is a major step forward and that’s not the end of it. It’s the beginning."
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4. Wealth management
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At UBS Wealth Management in Asia renminbi has gone from zero to 3% of assets within three years. "What we tried to do was build an investment product shelf so clients could use the renminbi as an investable currency," says Scott Wehl, head of banking products for Asia Pacific at UBS Wealth Management. "There is still a lot of renminbi in cash, although the proportion has got a lot lower as clients have put renminbis to work in dim sum bonds and investment funds."
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5. Off-shore RMB loans
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"A natural evolution is the development of the renminbi financing market," says David Morton, regional head of corporate banking at HSBC. "The bond market is only one aspect; there has not been similar growth in the renminbi loans market. But a large part of that deposit base was put there because investors saw the renminbi as a one-way bet on the exchange rate. As people have started to think the currency has reached fair value, and that there may be upwards and downward movements now, as a consequence you will see a significant lift in the renminbi loan market."
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No doubt the internationalization of the RMB will expand the menu of revenue-generating products and services for cross-border banks. Taking part in the dim sum market offers prestige and headlines, but it is in these other areas that banks can, for now, generate large fees.
For a deeper look at this issue, read Euromoney's June feature.