A healthy dose of competition between global offshore renminbi hubs will generate new products and efficient regulation, yet analysts warn that this competition will become counter-productive if cities battle over the ability to clear more cash.
The analysis comes as cities such as Hong Kong, London, Singapore, Taipei and even Paris and Tokyo ramp up their renminbi capabilities to take advantage of growing trade settlement and investment opportunities. Each market hopes that creating renminbi-friendly banking infrastructure will lead to greater profits as the currency’s use proliferates.
However, in these hubs’ bid to strengthen their renminbi capabilities, it’s possible that the competition can do as much to confuse as it can to develop this burgeoning market.
“What is most important is to compete on the things that can be competitive and not necessarily things that just inject more cost and complexity in the system,” Lisa O’Connor, initiative director of RMB internationalisation at Swift, told audiences at the Euromoney Conferences’ Global Offshore RMB Funding Forum on May 8. “What I mean is that, from an infrastructure perspective, there’s certainly benefit in leveraging Hong Kong’s infrastructure. So why would you necessarily clear these currencies in many different centres? That just increases cost. Are we really providing benefit either locally or regionally?”
The emergence of clearing banks in Hong Kong, Singapore and Taiwan have helped develop different versions of the offshore currency, respectively called CNH, CNS and CNT, which can feasibly trade at different spot and non-deliverable forward rates.
Such complexities affect the way market participants manage their positions.
“I would really encourage the competition on products, and on advancements in regulation. But for the non-competitive aspects that might add cost and complexity, you should definitely consider that very carefully,” said O’Connor. “Hopefully this will make it a more efficient market when it comes to everything that happens after you [clear renminbi].”
There is already evidence that this is happening: cities have been mimicking each other’s renminbi best practices, which shows how competition can have a positive effect.
“There is the matching of regulations that these markets are trying to do. We see a certain level of regulation in Hong Kong...and then all of a sudden Taiwan becomes quite significant in a short amount of time. They have different regulations allowing what you can do as a renminbi retail investor, and suddenly you see Hong Kong and HKMA match that regulation,” said O’Connor.
She elaborated that Hong Kong and Taiwanese residents face different restrictions on how much can be remitted into their markets daily – up to Rmb20,000 (US$3,260) a day in Hong Kong and Rmb50,000 in Taiwan – and face different restrictions on the beneficiaries of this cash. She understands that Hong Kong is attempting loosen rules to even its status with Taiwan.
Other changes include the Hong Kong Monetary Authority (HKMA) recently eliminating both the need for banks to maintain a 25% CNH reserve requirement ratio and the cap on banks’ renminbi net open position. And last year, the HKMA announced that non-residents would be allowed to freely exchange currencies into CNH and open CNH accounts. This puts Hong Kong on the same level as London, Singapore and Taiwan, which do not have such requirements.
This dynamic between hubs can also help the offshore bond market to develop.
“I think [offshore renminbi hubs] should compete,” said Chi Lo, senior strategist for Greater China at BNP Paribas Investment Partners. “Renminbi products are not like US Treasuries, which you can buy anywhere in the world. Right now, there are market regulation differences because there’s an offshore and onshore market. In Taiwan, there are different regulators. These are all the regulatory things that are hindering the development of the offshore bond market, but once all these differences in regulation are done away...That would be a good thing.”
Angus Hui, an Asian fixed income fund manager at Schroder Investment Management, added that competition to create longer-term products could be a lucrative way to advance these local markets as well as attract interest from Asian pension and other sizable institutions in need of long-duration products.
“There should be competition between hubs for longer-term products that will appeal to Asian pensions – these names are looking for longer-term allocations and this can be part of the process for centres [to develop],” he said.