Analysis: First Hong Kong-London RMB forum lacks punch
China’s strict controls on CNH liquidity will hamstring London’s offshore renminbi capabilities despite bankers’ best intentions.
At the first meeting of the Hong Kong-London Forum to Promote Cooperation on Development of RMB Business on May 22, attended by Hong Kong officials, London financial regulators and executives from seven banks, the industry’s top minds were expected to devise a cooperative framework to popularise the offshore renminbi in both usage and trade. Yet while good ideas were shared, the group doesn’t seem to have had much bandwidth to affect real change.
Several sources present at the meeting told Asiamoney PLUS that the committee sought to tackle the issue of low liquidity in the offshore renminbi - or CNH - market, the development of financial infrastructure, the need for uniform documentation when dealing in the currency and keeping the market transparent during its development process.
By the end of it, the cities’ financial industry, which included representatives from the Hong Kong Monetary Authority and the UK Treasury, as well as executives from The City of London Corporation, Bank of China (BoC), Barclays, Deutsche Bank, HSBC, J.P. Morgan, Royal Bank of Scotland (RBS) and Standard Chartered each agreed to work more closely together and begin developing generic market products, including bonds and repos. Attendees also identified some goals that could be immediately executable, such as introducing direct cross quotations between the renminbi and euro, which HSBC set an outline for this week.
A second meeting to be held again in London in autumn but the forum did not institute any concrete targets to be achieved by that time.
Bankers voiced their disappointment at the result of the meeting. “To be brutally honest, this meeting hasn’t had the impact that we’re used to seeing from previously renminbi- or CNH-related forums ... this was a lot of hype but not a lot of actionability,” said one presenter at the forum.
“I think there were some things said that can be immediately executable – like introducing direct cross quotations from renminbi into sterling or the euro – but other ideas that could move the market are subject to usual constraints, and that’s not going to change without more liquidity,” said another banker in attendance.
This is no fault of the group itself. The forum was intended to be a private-sector gathering where banks on two continents could devise how to leverage their capabilities to make the most out of the emerging CNH currency. But without the help of more liberal regulation there’s not much that these banks can do.
One theme that was repeated among bankers in attendance is the need for London to either have a direct currency swap line with Beijing – which would allow the UK to directly exchange large quantities of sterling for renminbi – or a clearing bank, which would give the city the ability to directly exchange renminbi without having to go through Hong Kong.
Yet these seem out of the question. The Bank of England (BoE) does not hold reserves of currencies that are restricted – and there is nary a currency more restricted than the renminbi. This will prevent the BoE from forging a direct swap line with Beijing, he said.
Further, London isn’t in line for a clearing bank. Rather, its trades will have to go through BoC in Hong Kong for all its exchange needs. Hong Kong is extending its clearing business hours from 18:30 to 23:30 to accommodate growing demand for renminbi exchange out of London and all the bankers in its time zone.
None of these solutions will help London boost its renminbi liquidity. And, as one banker said, though Hong Kong will look to be helpful where it can, the city may be loathe to filter much of its own hard-fraught liquidity to London as it will need its own CNH to help its market develop.
“At this stage this is not a place where you want to introduce any innovative products. Without the liquidity to support this infrastructure, everything that will come out of London will have to be generic,” said one Asia-based banker.
But even this presents problems. As dealers explain, BoC Hong Kong has a quarterly quota of renminbi that it is allowed to clear. The bank, they say, isn’t always the most transparent in alerting other global financial institutions to how much has been cleared by the end of the quarter. That uncertainty will affect banks’ ability to communicate to their clients that expect their cash to be cleared, and the problem will only magnify the more widespread these dealers are.
As it stands, China has given London publicity for its efforts to become an offshore renminbi hub, but it has not supported it with much more. Without a direct means to gain liquidity, the city won’t be able to do much on its own merit other than promote bonds and its foreign exchange services.
But this may be the reality of the situation: instead of expecting London to rival Hong Kong to become an offshore renminbi centre, the point of London may be to be a CNH service hub where bankers can facilitate straight-forward transactions.
There have been high expectations for London and its ability to attract sizable renminbi-denominated business, but if it doesn’t have access to CNH reserves its position will always be hamstrung. If this is the case, it’s the role of the market and its participants to manage expectations so global investors know what to expect and know London’s limitations. If investors are anticipating a derivatives or credit default swaps market to emerge out of Europe, they should be pointed in the direction of Hong Kong.
The sharing of ideas between Hong Kong and London is certainly a positive move for the development of the offshore CNH market on the whole but that’s all these forums will mean until Chinese regulations ease. And dealers shouldn’t expect anything different come the second Hong Kong-London renminbi forum in the autumn.