It all started in Hong Kong.
When China decided that it was time to (narrowly) open its current account in 2004 and allow non-mainland residents to hold renminbi deposits, it happened in Hong Kong.
And when China made its first step towards the liberalisation of its capital account via offshore renminbi bonds, it was Hong Kong that greeted that first deal from China Development Bank’s local branch.
The market itself was named dim sum after Hong Kong’s iconic cuisine, a moniker that has grown synonymous with all offshore RMB issuance.
Finally, when it came time for China to let foreign retail investors play in its stock markets for the first time, it chose Hong Kong in 2014 as the other end of the Stock Connect link. And the experiment continues, with the Shenzhen Stock Exchange set to also link up with the Hong Kong market in possibly just a few weeks.
But after a mostly sleepy year for RMBi, primarily due to China’s slowing economic performance and foreign exchange woes, things have taken an interesting turn.
In Hong Kong, the results of the local legislative election concluded on September 4 have signaled in even clearer terms that the relationship with the mainland remains strained.
While Beijing is keener to emphasize the first half of the ‘One Country, Two Systems’ principle, citizens of the former British colony are also getting firmer about their commitment to the second half.
What happens behind closed doors in Beijing’s halls of power remains a mystery, but it is not hard to imagine that someone must have taken note of the trend.
The political consequences of the growing anxieties remain to be seen, through the filter of RMBi, there are hints that a shift in mindset may be taking place.
Two developments in particular point in that direction. One was the launch in October of the first overseas linkage to the China bond market by Clearstream, the Deutsche Borse-owned ICSD, beating the Hong Kong Exchange’s long promised plan to deliver a Bond Connect with China.
The Clearstream link essentially lets small and mid-sized bond investors from Europe gain access to the Chinese market with their existing accounts. While this may seem mostly a technical innovation, it is a ground-breaking one. Especially when considering that until less than a year ago only a handpicked group of QFII and RQFII entities that went through a laborious application process with Chinese regulators were allowed into the market.
The second twist was an announcement last week by the Dubai commodities exchange that it would become the first offshore exchange to use the Shanghai gold fix for an RMB gold futures contract. This milestone must also hurt HKEX, given that in its strategic plan laid out this year it said it wants to become a venue of choice for RMB commodities trading.
Time will tell, but a couple of elements seem to be driving Beijing’s focus further away from home.
The first is time zones. To make the RMB truly global, China has need to create an infrastructure that works beyond the Asian trading day, and to do that it needs to commit to more landmark projects in Europe, the Middle East and, at some point, the Americas.
The second and perhaps more important factor is good, old diversification.
While Hong Kong could continue to serve well as the offshore testing ground for RMB initiatives, the Hong Kong market is simply too small to serve all purposes under the RMBi strategy. The Dubai commodity link is a case in point, where a market much better suited for the purpose that is being targeted.
This could be the start of wider trend. For example, it would not be hard to imagine China targeting London for specific initiatives in the foreign exchange markets, given the UK’s capital dominance in that space.
This shift may be a bad sign for Hong Kong’s role as an international financial hub, but it also indicates that the RMB may be finally coming of age and ready take up a role as serious global currency.