Vats of ink are being split on a seemingly daily basis on London’s bid to become an offshore renminbi centre, following the UK’s move two weeks prior to establish a forum with Hong Kong aimed at launching clearing and settlement systems for the RMB, creating market liquidity and developing RMB-denominated products and services, more generally.
For example, this is from Reuters last week:
| London's growing role as a major offshore hub for the Chinese currency looks set to generate huge demand here for yuan-denominated bonds from large European investors, and more interest from corporates in trading the renminbi, a senior HSBC (HSBA.L) official said on Monday.Trading offshore renminbi (RMB) in London will become much easier when Hong Kong clearing hours are extended, David Pavitt, head of emerging markets foreign exchange trading at HSBC, said in an interview. |
The excitement is understandable. The currency is fortified in its onshore market and thus, the RMB represents just 0.4% of turnover in the global foreign exchange market and 0.1% of international debt securities, according to the IMF. But market consensus is betting that the disconnect between the size of China’s real economy and its financial system relative to global GDP can’t last for much longer. And herein lies the potential early-mover advantage for London. But what does using London as an offshore RMB centre mean in practice and what are the regulatory hurdles? Here’s an instructive cheat-sheet, which we have reproduced in full, from the Royal Bank of Scotland, back in September, when UK Chancellor of the Exchequer George Osborne first launched a RMB charm offensive.
| 1. What is the difference between setting up an offshore CNY trading hub and introducing the use of CNY for trade and investments? There is a distinct difference between the two, in our opinion. The former implies allowing interbank market-making of CNY against USD and other foreign currencies, treating CNY like a deliverable currency, outside of China. It also means allowing wholesale trading of CNY for all types of transactions by any interbank market players within the host country as well as their counterparts in other foreign third parties. This clearly requires more institutional arrangements to get it going, as discussed in the next point. On the other hand, using the CNY for settling cross-border trade with China has already been fully liberalised in June 2010; and likewise, the product types for CNY-denominated investment assets outside of China have already been expanded from bonds to equities and more recently, direct investments, subject to regulatory approvals for remittances of CNY funds. Hence, it is only a matter of authorities in a foreign country to decide how they would allow their domestic banks and companies to engage China’s onshore banks and companies.
2. What does it take to set up an offshore CNY trading hub? In our view, there are two critical ingredients to enable an offshore centre to start trading CNY – direct clearing line(s) for banks in the offshore centre with the PBOC; and a CNY swap line from the PBOC for the central bank in the offshore centre. The first arrangement is to allow the banks to take CNY in and out of China to settle trades while the second arrangement is to provide a standby facility for the foreign central bank to obtain CNY liquidity from the PBOC during times when the banks’ direct clearing lines are choked for whatever reasons.
If a host country does not have such an institutional set-up, the scale of CNY- denominated transactions will be confined to cross-border trade with China and investment activities defined by China since the settlement of CNY trades can be done only either through Hong Kong or on a deal-by-deal basis with PBOC.
If a host country does not have such an institutional set-up, the scale of CNY- denominated transactions will be confined to cross-border trade with China and investment activities defined by China since the settlement of CNY trades can be done only either through Hong Kong or on a deal-by-deal basis with PBOC.
3. Would CNY traded in London be fungible with that traded in HK? Yes and it is also fungible with CNY onshore in China, albeit at on a restricted basis. The restrictions would come from any existing capital controls prohibiting the deliverability of the CNY funds between the centres. Since neither London nor Hong Kong has any controls, the CNY traded at both centres will be “readily” fungible whereas with capital controls in China, the offshore CNY funds will only be interchangeable with the onshore CNY funds through the channels which have been opened up, as mentioned under Point 1 above. Basically, PBOC has not set a parallel currency which can only be used offshore or to any one geographical offshore centre.
4 Would CNY trade in London at the same price as it trades in Hong Kong? It will be the same as trading EUR or any other deliverable currencies. This is the reason why we do not think there will be a need to come up with a different code e.g. CNL to differentiate from the CNH code used in Hong Kong, which is incidentally not an ISO-recognized code. Since there is no new currency created, there has always been just CNY. The code CNH was conveniently created to allow Hong Kong-based market players to differentiate their pricing from the onshore traded CNY exchange rate.
5 How will it differ from Hong Kong’s CNY trading hub? There is no distinction apart from London trading hours being different from Asian trading hours.
6 What is happening in Singapore? China has yet to allow Singapore to set up an offshore "trading centre" for CNY. Currently, a local bank and a foreign bank in Singapore can directly access the CNY150bn swap line that PBOC has granted Singapore back on 23 July 2010 for back-to-back deals on a 3-month swap basis. Note that the original swap line that MAS received from PBOC is a 3-year swap line. We suspect Singapore has not been allowed to set up an offshore CNY trading centre for two reasons - first, China does not want to create competition for Hong Kong, not at this nascent stage of development of the offshore CNY market; and second, the necessity for another offshore CNY trading centre in the Asian time zone for promoting the expansion of offshore CNY market is not as compelling as adding an non-Asian offshore trading centre.
7 What does globalising offshore CNY mean? To us, this means letting the deliverable form of CNY trade at every financial centre globally, allowing CNY trade round the clock like other deliverable currencies. However, this is still not the same as making CNY fully convertible. But it is pretty much the very last step towards full convertibility. |
Nicely put.
More profoundly, there seems to be a growing disconnect between the internationalization bulls - primarily those in the capital markets industry who argue that the supply of RMB-denominated securities will automatically sky-rocket thanks to surging demand - and certain economists, such as Michael Pettis of Peking University. The Beijing-based professor on countless occasionshas nicely encapsulated the case for the bears, by arguing that the bullish rhetoric about how financial centres can piggyback on a globalized renminbi is premature since Beijing has taken just baby steps in liberalising its capital account. With good reason, he argues, since true RMB internationalization would require liberalising interest rates, the exchange rate regime and exposing the capital market and banking system to the whims of the market, a politically and economically destabilizing shift in China’s growth model.
For now, London can easily scale up its role – from a low base – in intermediating RMB trade and portfolio flows by expanding its range of products and services. But that’s qualitatively, economically, financially and politically distinct from the RMB having the status as a truly global reserve currency, a development that would have profound consequences for private financial markets, central banks and global balance-of-payments-trends alike.