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Asia-PacificJuly 1 2012

Europe ready for arrival of the renminbi

As the Chinese authorities lift restrictions and open up the renminbi market stage by stage, the significance of what is unfolding has not gone unrecognised in Europe, and, according to a recent survey by The Banker, it is not only those already doing business with the country that are interested in the renminbi's development. As London takes steps to establish itself as an offshore renminbi financial centre, many are anxious to take advantage of the opportunities soon to be available.
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The rise of the renminbi is a hot topic for the banking industry, and awareness of the role of the Chinese currency has spread beyond Hong Kong to London, which is establishing itself as an offshore renminbi financial centre. Many banking executives have already recognised the potential for the renminbi and envisioned a world where it is a fully convertible reserve currency of comparable status to the US dollar. Although reluctant to predict a date for when such a vision will come to fruition, banks are keeping pace with the developments of the Chinese central bank as it gradually lifts restrictions, putting the currency on the path to internationalisation.

Establishing offshore centres beyond Asia is crucial for the currency to internationalise, and now the awareness of the renminbi has spread beyond those working in the banking industry. A survey by The Banker demonstrates that awareness has now spread to Europe, where professionals – even those outside the banking industry, and who do not have a business relationship with China – are aware of the future significance of the Chinese currency.

TABLES_1_Europe ready for arrival of the renminbi

Opening up

The renminbi still needs to go through a number of stages before there is no differentiation between offshore and onshore renminbi and there are no restrictions in moving renminbi to and from mainland China. For it to become a fully convertible reserve currency China needs to open up its capital account, but so far many observers have been surprised by the pace of change.

Using renminbi for trade settlement – the first stage of becoming an international currency – now has few restrictions, if there is genuine trade underlying the transaction. The trade settlement scheme is currently limited to certain banks, but now it is possible for all mainland Chinese companies to use the renminbi, as what started as a pilot scheme in 2009 has gradually been rolled out across the whole country.

Chinese importers and exporters previously had to be registered as mainland designated enterprises, but as of June 2012 that requirement was no longer necessary. In the same month another hurdle was removed when the People’s Bank of China – the central bank – implemented a pilot scheme in Shanghai enabling local banks and companies to apply to reduce the documentation that is necessary for each transaction.  

While there is still red tape involved in proving that transactions are for trade purposes, the latest steps to loosen the restrictions demonstrate the direction in which the Chinese central bank is moving. For importers and exporters, paying in renminbi removes the foreign exchange risk and speeds up the receipt of payments.

Although renminbi trade settlement has been possible for companies doing business with China, the full potential of the scheme has not yet been realised. Anecdotally, banking executives have said that Chinese companies feel their international trading partners have not been ready to settle in renminbi and vice versa. The recent steps by the People’s Bank of China could provide the tipping point that is needed to make renminbi trade settlement the norm for those doing business with China, as the process is now quicker and simpler.

Stepping stones

Such steps demonstrate the gradual moves that the Chinese authorities have been making to liberalise the currency. The stages have been carefully planned, with each step starting as a pilot scheme in one area then gradually being extended so it eventually becomes widespread. With trade settlements, the liberalisation process is almost complete, and then the next stage of the renminbi’s internationalisation is to use the currency for financial, ie. non-trade, transactions.

Another marker of the renminbi’s increased international significance was the decision by China’s central bank to allow direct trading between the renminbi and the Japanese yen on the inter-bank foreign exchange market, which came at the end of May 2012. As the adoption of the renminbi seeps into all areas of the financial system and becomes internationally relevant, it is inevitable that renminbi financial centres will develop around the world.

Hong Kong was the birthplace of the offshore renminbi market, and has provided a key part of the infrastructure needed for clearing trade transactions, with payments being routed through the Bank of China Hong Kong on their way to mainland China. In terms of financial transactions, in 2010 global fast-food chain McDonald’s became the first foreign company to issue an offshore renminbi-denominated ‘dim sum’ bond.

While the emergence of other offshore renminbi centres could be seen as a threat to the renminbi business that is currently being done out of Hong Kong, it is inevitable that if the currency is to become international, other financial centres around the globe have to be involved in the currency’s development. Singapore has been challenging Hong Kong as a renminbi financial centre, but while China retains control over its capital account, observers argue it is likely that Hong Kong will retain a special status in the internationalisation process because of its unique relationship with China.  

Taking shape

Moving further afield, developments are gathering pace in establishing London as an offshore financial centre. London is uniquely positioned because of its time zone that places it between Asia and the US, and has already established itself as the major financial centre in Europe. Added to this has been the drive by the UK authorities to establish the city as an international renminbi centre.

In April 2012, the City of London Corporation launched the London Renminbi Initiative. In the same month, London witnessed a landmark bond issue when HSBC raised Rmb2bn ($314m) in the first dim sum bond in London. Although there has not been a flurry of similar transactions, the move was significant as it marks an important step on the path to internationalising China’s currency.

Stakeholders in London’s financial services industry – including the UK Treasury – have been co-operating with their counterparts in Hong Kong to establish the infrastructure for the renminbi to develop as an international currency. In May, the London-Hong Kong Forum agreed to extend the operating hours of the clearing bank in Hong Kong to 23.30 so that it could be open for business into London’s afternoon hours.

At the start of 2012, when these plans were first discussed, Norman Chan, chief executive of the Hong Kong Monetary Authority, said: “By establishing appropriate linkages with Hong Kong’s offshore renminbi platform, banks in different parts of the world will be able to provide a comprehensive range of renminbi banking and financial services to meet the rapidly increasing demand of their customers. Hong Kong and London are well placed to develop offshore renminbi business and closer co-operation between the two financial centres will bring about mutual benefits and a win-win situation.”

Following developments

The significance of such steps is apparent to many professionals in Europe and awareness of the currency extends beyond those working on making the internationalisation process happen. The Banker’s survey was conducted among more than 200 professionals across various countries in Europe. The respondents were made up of senior executives and senior management-level professionals, with the majority working in the financial services industry.

When asked whether they were aware of the developments to liberalise the renminbi, an overwhelming majority – 92% – of respondents said that they were aware of the developments, and when asked in more detail about the renminbi, their answers show how relevant the Chinese currency is to many businesses in Europe.

When asked if their company is following the internationalisation of the renminbi, 46% replied 'closely’ and 42% said ‘to some extent’. Of the respondents, a 73% majority already do business with China, and of those 27% said that the proportion of their company’s business with China is high and growing. Another 32% said that the proportion of their business with China is moderate and growing, and another 37% said that it was low and growing.

Closer co-operation between [Hong Kong and London] will bring about mutual benefits and a win-win situation

Norman Chan

These results show that, regardless of the current extent of their dealings with China, the level of interaction with the country is growing in many companies, which is in line with the projections for the future dominance of the Chinese economy.

London calling

For now it is Hong Kong that dominates the market in terms of offshore renminbi products. For the survey respondents that use renminbi products and services, 49% said that their renminbi banking relationship was in Hong Kong, with only 12% having a banking relationship in London. While this seems like a small proportion, there was widespread acknowledgment that the renminbi would be significant in the future. When asked of its significance, 68% of respondents said that the renminbi will be ‘hugely important’ in 10 to 15 years.

On the issue of the renminbi as a reserve currency, 46% of respondents agreed that the currency would be a reserve currency of similar status to the euro in 10 to 15 years. However, respondents were more sceptical about its status as a reserve currency compared to the US dollar. When asked of this eventuality, only 7% ‘strongly agreed’ with the statement that it would be similar to the US dollar in 10 to 15 years, while 37% ‘agreed’ and 36% disagreed.

When asked where the opportunities lie in the renminbi market, 68% of respondents identified currency trading and rated the potential for this area highly.

Of the European cities that were given as possible financial centres for the renminbi, London was the clear leader, with 93% selecting the UK’s capital city. In an open question to elaborate on their reasoning for this decision, the majority responded that it made sense for London to be the renminbi centre as the city has already been established as the major financial centre of Europe.

One respondent commented that, after Hong Kong, London will once again establish itself as an important marketplace for securities, similar to the Eurobond development in the late 1960s. Such sentiment, as demonstrated in this survey, shows that as the renminbi continues on its path to internationalisation, its significance cannot be ignored. 

TABLES_2_Europe ready for arrival of the renminbi

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