By Noah Sin
The combination of China’s One Belt One Road (OBOR) policy and Bond Connect system will allow the renminbi to be used more widely as an international investment and reserve currency, said experts at the Hong Kong Exchange’s renminbi fixed income and currency conference last week. This could be a breakthrough in renminbi internationalisation (RMBi).
The Bond Connect, expected to be launched in July, is a system to connect the Chinese and international bond markets, allowing investors in each to access the other. However, when the system is launched, which could be as early as July 1, it will only permit trading flows into China — so-called ‘northbound’ trading.
“Southbound is unlikely to happen in the next couple of years, while the monetary supply outside China continues to be as loose as it is today,” said Charles Li, chief executive of HKEX, at the conference on June 8. “But at some point when the interest rate environment changes, when the yield environment changes, when China is different, then the massive investors in China will also become participants in the international market.”
Nevertheless, Bond Connect has raised the prospects of large capital inflows into China’s market and is expected to hasten the full inclusion of Chinese bonds in key global investment indices.
But Ba Shusong, chief China economist at HKEX, said the greatest significance of the Bond Connect was promoting the renminbi as an investment currency.
“Without an open bond market, it’s very difficult for the renminbi to truly become an international currency,” said Ba. “The next drive for internationalisation is to shift [the renminbi] from trade settlement [currency] to an investment as well as reserve [currency].”
Ba reckoned the Bond Connect would increase the amount of renminbi assets held by foreign investors. This would help create an ecosystem for renminbi internationalisation, increasing the number of renminbi financial products, such as hedging tools, to match foreign investors’ new exposure to the currency.
BELT AND ROAD
Another part of that ecosystem is OBOR, China’s flagship development initiative. Ken Chiu, director and regulatory adviser of the renminbi competence centre at BNP Paribas, said OBOR could move renminbi internationalisation to a new stage.
“In the early stages, China has focused on developing the offshore market,” said Chiu. “Now, instead of creating an offshore renminbi market, China is building up a global renminbi value chain, for example, with the Belt and Road initiative.”
Lian Ping, chief economist at Bank of Communications, agreed that OBOR would be crucial to the renminbi internationalisation project.
“With OBOR, quite a few projects will be financed in renminbi,” said Lian. “This will make the renminbi an investment currency.”
Lian also believes more commodities trade will be denominated in renminbi as OBOR takes off, since a lot of countries along the OBOR route are commodity exporters. But this could be a poisoned chalice, bringing new risks, both political and economic, to RMBi.