Offshore RMB asset pool to increase on trade settlement

Offshore renminbi deposits increased 87% year-on-year in 2011. At the end of December, they stood at Rmb588 billion ($191 billion) but they have declined in recent months. As two-thirds of renminbi deposits in Hong Kong are from corporates, as the currency is used more for trade settlement, this will maintain the growth in deposits, says Nomura.

Trade settlement in renminbi has seen a rapid increase during the past two years but remains in the early stages of its development. Payments in the currency jumped 33% in February from the previous month according to the Society for Worldwide Interbank Financial Telecommunication (Swift).

However, the renminbi ranks just 17th in the list of world payment currencies.

“Currently, only 8.6% of China’s trade is settled in RMB,” said Daniel Shum, Hong Kong bank analyst at Nomura, in a report on March 27. “With the internationalization of RMB, we believe the use of RMB as a medium of trade is likely to increase rapidly in the years ahead.”

In part, this will be driven by the desire of Chinese corporates to hedge their exposure as they battle against an appreciating currency.

“Chinese manufacturers have very thin operating margins (2-3%), leaving them exposed to RMB appreciation,” said Shum. “A 2-3% strengthening of RMB from current levels can conceivably destroy manufacturers’ profits. As such, there is a strong incentive for Chinese SMEs and manufacturers to use RMB for trade as it helps hedge their FX currency exposure. Hence, we expect RMB deposits in Hong Kong to increase further.”

The increase in RMB deposits will be a boon for Hong Kong banks, which will be able to earn increased margins on loan growth. At the moment, the city’s banks have 0.3% margins on RMB business compared to net interest margins of 1.5%.

RMB-denominated loan growth has increased 16 times during the past year, according to Nomura research, though this is from a low base. Challenges remain for large syndicated transactions to gain traction, however, due to a lack of pricing benchmark.