“There is nothing more important than the internationalisation of the renminbi.” This is the emphatic viewpoint of Tian Guoli, chairman of Bank of China (BoC), which has 619 overseas institutions in 40 countries, more than any other Chinese bank. The BoC chairman is adamant that the internationalisation of the renminbi is growing at a remarkable pace and he is keen to take full advantage of the global opportunities available as the renminbi gains global traction.
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In 2013, China’s merchandise trade exceeded $4000bn, making it the world’s largest trading country. But just as China’s trading might is emerging, the use of the renminbi for trade and investment is growing dynamically.
Extending the reach
In 2009, China started a pilot programme that permitted the use of the renminbi to settle trade conducted in some mainland Chinese regions, with Hong Kong, Macau and the members of the Association of South-east Asian Nations. Since then, cross-border renminbi settlement has grown dramatically.
According to central bank statistics, the amount of cross-border settlement jumped enormously from Rmb3.58bn ($577.9m) in 2009 to Rmb5160bn in 2013. Under the current account, the proportion of renminbi-denominated trade went from 6.6% in 2011 to 11.7% in 2013, and in terms of the capital account, renminbi-denominated direct investment in 2013 increased by 88% from the end of 2012.
BoC maintained its leading position in terms of cross-border renminbi settlement volume, with Rmb3980bn in 2013, consisting of Rmb1770bn for domestic institutions and Rmb2220bn for Hong Kong and overseas institutions, while achieving year-on-year growth of 59.8%.
Unstoppable growth
The growth of renminbi usage has been remarkable in other ways. By the end of 2013, renminbi cross-border payments had been carried out in 222 countries, with more than 2000 offshore banks taking part in the payment and clearing process. In March 2014, the renminbi became the world’s seventh largest payment currency, accounting for 1.62% of the global payment and clearing market, and its share is continuing to grow fast.
According to the Society for Worldwide Interbank Financial Telecommunication (Swift), the global provider of secure financial messaging, renminbi clearing amounted to more than $50,000bn in the first quarter of 2014, more than half of the amount for the whole of 2013. And the Basel-based Bank for International Settlements (BIS) has reported that the renminbi is now the world’s ninth largest transaction currency. BoC statistics suggest that while US dollar activity in the fourth quarter of 2013 increased by 2% and euro, pound and yen activity declined, renminbi activity rose by 23% during the same period.
In looking to the future, Standard Chartered Bank projects cross-border renminbi settlement is expected to quadruple to more than $3000bn by 2020, with the possibility that 30% of Chinese trade will be denominated in renminbi, double today’s levels. Another major international bank, HSBC, expects that at least half of all China trade with emerging markets will be settled in renminbi by the end of 2015, compared with just 3% in 2010.
While the growth figures are dramatic, it is clear from comments from the People’s Bank of China (PBoC) and the Bank of China that the central bank is taking a cautious approach to the renminbi internationalisation process and wants to see a natural process of market evolution for the renminbi as both an international payment currency and an investment currency. But it is not an international investment currency yet, and some bankers suggest it still has a long way to go.
Offshore hubs
Meanwhile, as London vies to become an offshore renminbi trading hub, with the PBoC and the Bank of England signing an agreement to this effect in March, Hong Kong maintains its dominance of the offshore renminbi payments market, according to Swift, with 72% of the market, followed by Singapore on 6.8% and London on 5.9%.
A lot is changing fast. The offshore market for renminbi did not exist until relatively recently, yet it now turns over an estimated $2bn a day. The total size of the Hong Kong 'dim-sum' bond market rose to Rmb572bn at the end of 2013. In the first four months of 2014, companies raised $10.8bn in offshore renminbi bonds – including both Hong Kong- and Taiwan-issued debt – more than double the amount during the same period in 2013, according to investment platform Dealogic. April alone saw $2.5bn of new issuance, in spite of the worries over the currency’s weakness.
In 2013, the China Securities Regulatory Commission announced its renminbi-qualified foreign institutional investor (RQFII) quota scheme, through which international investors use their Chinese currency holdings to buy onshore assets. The total quota available has risen from Rmb70bn to Rmb270bn, and RQFII flows have risen from zero in 2012 to almost Rmb150bn in 2013.
Meanwhile, in a important development in mid-June, the London-based subsidiary of China Construction Bank was designated a clearing bank in London for the renminbi, the first UK renminbi clearing bank to do so, following greater efforts by the UK and Chinese governments to encourage the renminbi market in London.
And in another development, a ‘mutual stock access’ plan, under which investors in Shanghai and Hong Kong will be permitted to buy foreign stocks in both directions across the border, was announced in April this year. This will pave the way for the cross-selling of funds and provide easier access to capital markets for investors and companies both inside and outside China, marking a further step in making the renminbi fully convertible.
Global potential
Looking ahead, China wants to do more with its resources, diversify its investments and play a greater role on the international stage. With foreign exchange reserves rising to just shy of $4000bn in the first quarter of 2014, roughly the same as its entire equity market, China has a lot of global potential.
Examining the investment area, in 2013 foreign direct investment (FDI), at $117.6bn, was $27.4bn larger than outbound investment at $90.2bn. However, it was significant that FDI only grew 5.25%, less than one-third of the rate at which outbound investment grew, marking a trend of Chinese companies looking abroad to expand their businesses.
According to Shen Danyang, a spokesperson for the Ministry of Commerce, China's outbound investment will exceed that of FDI sometime in the near future. "If not this year, it could be next year or the year after when China's outbound investment surpasses investment inflows," he says.
The Ministry of Commerce also says that about 90% of the total outbound investment went into six industries: commercial services, mining, wholesale and retail services, manufacturing, construction and transportation. And in a report published by KPMG, most of the outbound renminbi is reported to have landed in the US, Australia, Canada, Brazil and the UK.
Opportunities abound
The internationalisation of the renminbi and the growth in outbound investment is creating huge opportunities for both domestic and foreign banks. And the banks are developing new means to track the latest changes in the renminbi. BoC, which claims a dominant market share of close to one-third of cross-border renminbi settlement among domestic institutions, has established two indices in 2013, namely the Cross-border Renminbi Index and the Offshore Renminbi Index. The figures for the two indices rose from 100 to 228 and 0.32 to 0.91, respectively, from 2011 to 2013, marking the accelerated process of renminbi internationalisation.
Standard Chartered Bank also created a Renminbi Globalisation Index, which measures renminbi activity across the key offshore markets of Hong Kong, Singapore, London, Taipei and New York. The index has grown rapidly to 1736 in March this year, up 9.4% from the previous month and 91.1% year on year.
What does the future hold? The renminbi is expected to become fully convertible in time and the gradual growth of renminbi settlement for both trade and investment is expected to grow steadily, amid fierce competition. Chinese banks will continue to be the dominant players but foreign banks, such as HSBC, will continue to strive for a bigger share of the cross-border renminbi settlement market.
“HSBC aims to become the most recognised and respected foreign bank in the country,” says Helen Wong, group general manager of HSBC Bank (China), and with 165 branches and sub-branches in China, up from 33 in 2007, HSBC is targeting foreigners and global companies coming in as well as Chinese citizens and Chinese companies going out.
BoC chairman Mr Tian is bullish about the opportunities ahead, and with BoC’s 102-year history and large global network, he sees the bank as a bridge between China and the rest of the world. As a result, he believes BoC’s overseas profits will grow in the long term from 20% of the bank’s total today to more than 30% in the future.
BoC will have plenty of tough competition from the big Chinese banks, as well as the foreign banks, although the international banks still only have a market share of 2%. But as the renminbi rises to greater global prominence, Jerry Zhang, CEO of Standard Chartered Bank (China), says: “The internationalisation of the renminbi is positive from the point of view that the world will be less dependent on the dollar, which will add more resilience and flexibility to the global financial system.”
