Just as market participants have been getting used to a two-way fluctuations in the RMB, there is a realization that FX is not the only thing that can move two-ways. RMB internationalisation is also no longer a one-way bet, with majority of outbound investment channels now closed down and limited activity taking place in RMB in offshore capital markets.
Starting with the central bank’s ban on cross-border lending, onshore bonds purchases and interbank repo transactions between the onshore headquarters of Chinese banks and their offshore clearing entities/branches in November, the contraction of offshore schemes quickly moved to imposing a reserve requirement ratio on offshore RMB deposits and suspending two way cash pooling services. Most recently, it has led to shutting down important outbound investment initiatives including the RMB-qualified domestic institutional investor (RQDII) and QDII.
At the same time, Chinese regulators appear to be speeding up programmes that encourage renminbi to flow onshore such as allowing more offshore institutions to participate in the FX and bonds market. There has also been an expansion of inbound investment quotas that included awarding asset manager Vanguard a whopping Rmb30bn ($4.6bn) under the RMB qualified foreign institutional investor (RQFII) schemee, the second largest quota in the world.
And let us not forget Panda bonds, the new source of RMB funding for non-Chinese issuers which has taken off rapidly since the market reopened in September.
Recent comments by Zhou Xiaochuan, governor of the People’s Bank of China, would seem to confirm the slowdown in promoting renminbi offshore. “RMB internationalisation is a winding path, and if speculation becomes the main focus in the FX market, then RMB internationalisation needs to give way to fight speculation,” he said in an interview over the weekend.
Clearly China’s short term target is financial stability amid a slowing economy, ongoing expectations of RMB devaluation and capital outflows. Given that RMB internationalisation has never been a purely economic decision or a market driven programme, there was always a chance that policymakers could pause the experiment.
However if China’s long-term goal remains make the renminbi a global currency, as evidenced by the effort it took to get the RMB in the IMF’s Special Drawing Rights basket, it needs to be careful that it does not reverse the gains of recent years.
For example, the fourth-quarter 2015 findings of the DBS RMB Index, released on February 15, shows that fewer respondents claimed that they have RMB business needs (customer order/ invoices/ trade settlement) in the next 12 months, while the same percentage of respondents claimed they expected to decrease their usage in the next 12 months.
Call it RMB re-nationalisation or playing it safe in extreme market conditions, there is no doubt RMB internationlisation will not be as aggressive as before, at least from the perspective of outbound capital account liberalization.
But it isn’t all bad news, after all, a more diversified and mature onshore market could serve as a more solid foundation for RMB global usage in the long run. Here’s hope the RMB market gets back into the swing of things in the Year of the Monkey.