While the naming of Bank of China NYC branch on September 21 was not unexpected, with the two governments agreeing on a plan to select at least one clearing bank in the US in June 2016, the pace is notable.
“This is a major recognition of RMB internationalisation by the US, given that for many years their involvement had been muted, until recently,” Carmen Ling, global head of RMB solutions, Standard Chartered, told GlobalRMB.
For Siddharth Tiwari, director of strategy, policy and review department, International Monetary Fund, the appointment gives greater standing to the RMB ahead of its inclusion in the IMF’s special drawing rights basket of currencies on October 1.
“[Safe] haven currencies are determined by the market,” said Tiwari during a teleconference on September 21. “They’re determined by the volume of transactions, underlying trade transactions, financial transactions, and they develop over time. And as China’s currency gets internationalised, the designation of New York as a trading [and] clearing centre is an indication they’re all going in the direction of firming up the role of the currency internationally.”
China’s foreign ministry spokesperson Lu Kang also said on Friday that the appointment of BOC NYC as the official RMB clearing bank is a landmark — both in terms of renminbi internationalisation and cross-border relations.
RQFII door
The announcement also marked another accomplishment for the working group on RMB clearing established by former NYC mayor Michael Bloomberg last year.
The group had seen its first concrete achievement in June 2016, when China granted the US an Rmb250bn ($37.5bn) RMB qualified foreign institutional investor (RQFII) quota, which will allow US asset managers to tap China’s market without having to route their investments through other RMB hubs in Asia or Europe.
The group had recommended a sizeable RQFII quota for the US to match the size of its market, as well as the appointment of a RMB clearing bank, earlier this year.
While no institutions have joined the programme in the US yet, a number of US-based asset managers, including industry heavyweights BlackRock and Vanguard, are already involved, having accumulated quotas of Rmb24.1bn and Rmb30bn respectively, according to GlobalRMB data.
More involvement, however, would require some effort.
“Usage of the RQFII programme in the US will require a lot more education and awareness,” said StanChart’s Ling. “On the other hand, there are many US investors who are no strangers to accessing China directly and have worked with channels like RQFII, QFII, the China interbank bond market access scheme, and the Shanghai-Hong Kong Stock Connect.”
“I think US asset managers with an Asia presence are already invested in China, so [the US RQFII quota] is more of an opportunity for US-domiciled medium-sized fund managers and insurance firms.”
Next on the agenda
A missing ingredient in the US RMB hub is a RMB and dollar swap line between the People’s Bank of China and the Federal Reserve to facilitate access by local financial institutions to an official liquidity facility. Hong Kong has had an Rmb400bn ($60bn) swap line since 2011, the largest globally, followed closely by the one signed between PBoC and the European Central Bank in October 2013 for Rmb350bn.
So far, the US is the only RMB hub alongside Zambia to have a clearing bank but no swap line, according to GlobalRMB data.
However, StanChart’s Ling expects an agreement to be not far behind.
“A swap line might be the logical next step,” she said. “There are no technical obstacles as establishing it is quite straight forward. It is more about whether they see the urgent necessity of a swap line. If there are not a lot of RMB flows on the US-China corridor then it’s not an urgent requirement. The two sides might like to wait and see how the hub evolves, [as] right now the liquidity is quite sufficient even without a swap line.”
An additional easing factor comes from the fact that several US institutions have a presence in Greater China, allowing them to tap RMB liquidity via their branches in the region.
As for upcoming developments, US corporates could benefit from the more direct linkage between the two countries.
In his statement, the spokesperson for China’s foreign ministry added that facilitating the clearing of RMB in the stateside was just one part of the lender’s responsibilities, and that Bank of China was also expected to develop renminbi bonds and derivatives in the US.
But more direct participation by local corporates in RMB capital markets, through the issuance of Panda bonds for example, is unlikely in the short term.
“I think over time we will see more adoption of RMB by US corporates,” said Ling. “But in terms of RMB bond issuance, if the US corporates want to tap the Panda market, there are still some issues with accounting standards, as the US GAAP standard is not recognised by China. The hope is that if there is interest in tapping the market, this announcement could become a way to reach some regulatory breakthrough.”
In the offshore dim sum market, the only US corporates to have made an appearance have been Caterpillar, the most recent such issuer with a deal priced in June 2015, Ford, and Yum! Brands, according to GlobalRMB data.