The internationalization of the RMB has been one of the most high-profile topics in Asia-Pacific finance for 2014.
China’s currency has yet to realize its full potential, but banks and businesses are under no illusion that its importance will continue to grow as China asserts itself further on the world stage. This growth has fuelled a battle to secure supremacy in RMB amongst a variety of players, including banks and some of the world’s largest financial centres.
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| London’s position as the leading global FX transaction centre gives its RMB-denominated FX trading business an edge Jinny Yan |
However, what twists and turns might 2015 bring in this all-important competition for influence in the RMB, and, by implication, the growing liberalization of China's capital account?
“There is a bit too much noise around the importance of competing geographies in the RMB space,” says Julien Martin, head of RMB competence centre, BNP Paribas. “If you look at it from a strategic point of view, Hong Kong started developing a clearing system and all these other necessary things in 2009. How much time will it take for places such as London, Frankfurt and Paris to get ready? It will take another few years.”
As the financial centres fight it out to claim RMB supremacy, certain fundamental changes in the use of the currency could also be important factors in its maturation.
“The real game-changer in the internationalization of RMB will be when China starts paying for commodities in RMB,” continues Martin. “This is what's going to make the difference between RMB as a smaller currency and RMB as a general international currency. A further game-changer will be the inclusion of local Asia markets in the main indices.”
However, the fight between financial centres for the spoils of the RMB market can often seem the more immediate battle, with several key geographies striving to define their role.
Jinny Yan, director, RMB solutions, Europe, Standard Chartered Bank, says: “In 2015, the test of for each centre will be whether they are able to successfully leverage on their competitive advantages and offer RMB products tailored to the rising and increasingly complex demands of individuals, corporates and institutional investors.
“Financial centres that are able to offer a full range of offshore RMB products will benefit. China’s biggest trading partners will naturally benefit with the rise of RMB as a global payment currency. However, those with the infrastructure to promote the usage of RMB as an investment currency are also at an advantage. The most attractive centres are those equipped to combine both.”
Fight for business
The strengths of the various financial centres in relation to RMB business differ, with both traditional infrastructure and new initiatives providing benefits in the fight for business.
“Hong Kong’s natural advantage as the leading RMB offshore centre is strengthened with the recent launch of the Shanghai-Hong Kong Stock Connect, and the removal of the RMB 20,000 per-resident per-day conversion limit,” continues Yan.
“London’s position as the leading global FX transaction centre gives its RMB-denominated FX trading business an edge. Together with the first non-Chinese sovereign dim sum bond issuance, and plans by LME to introduce cash-settled RMB-traded mini metals future contracts, the UK’s commitment to the offshore RMB market is compelling.
| We are seeing a very aggressive covert currency war going on Greg Matwejev |
She adds: “Singapore, which now enjoys dedicated cross-border renminbi channels via the Suzhou Industrial Park and Tianjin Eco-city, has also proposed allowing China-incorporated financial institutions to issue RMB-denominated debt instruments in Singapore directly.”
The level of competition in RMB slowly heated up between the banks in 2014. Banks have been making a big push to publicize their capabilities in RMB and build their reputations for the future.
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| The future of the RMB: special focus |
“There is fierce competition between banks for RMB business,” says David Pavitt, head of renminbi business development, EMEA, at HSBC. “It still has huge potential, so to be at the forefront now is a good position to be in. The Chinese banks themselves are actually relatively new to trading offshore RMB, but they are catching up fast so the competition is only going to increase.
“When you look at the market spread for spot USD/CNH now, compared to where we were two years ago, you can see that competition, in conjunction with increased interest and requirements to transact in RMB, has played a huge role in reducing transaction costs.”
While the RMB has, in recent years, been seen as a one-way appreciation bet, 2015 is likely to see depreciation, say market players.
Greg Matwejev, director, FX hedge fund sales at Societe Generale Newedge, concludes: “At the moment, it's probable we are not going to see any more RMB appreciation. You are seeing the currencies of China's competitors in the export market depreciate exponentially. China does not want to see a loss of competitiveness with its trading partners in Asia.
“We are seeing a very aggressive covert currency war going on. And I think with strong conviction, we are going to see the RMB depreciate against the US dollar.”