The internationalisation of RMB: challenges and opportunities
by Agnes Vargas, Regional Head Greater China & ASEAN, Commerzbank
Since the launch of the cross-border trade settlement scheme in 2009, the liberalisation of the Chinese currency, the renminbi (RMB), has been a hot topic for the financial industry. This liberalisation has been an evolutionary process, although one executed at a clip that is both impressive and a concern for treasurers perhaps caught unaware by the changes. And, given that there is little sign of a relaxation in the speed of progress, the need for corporate treasurers – as well as the banks that service them – to stay abreast is becoming more acute than ever.
That said, thus far corporates have responded well to the liberalisation. Many observers now expect around 20% of Chinese trade to be settled in the local currency by 2015, a figure unimaginable at the beginning of the liberalisation process (given historically-stringent regulations). And then there is the fact that daily RMB trade has tripled to US$120 billion in the past three years.
Certainly, the RMB’s internationalisation now appears to be irreversible. New reforms are emerging regularly, with fresh regulations and pilot schemes being announced almost on a monthly basis. And while these are obviously strong opportunities for companies able to take advantage of the reforms, they also present adoption and operational issues for corporate treasurers.
Proactivity is the key. Corporate treasurers need to be on top of the changes, and even predicting (and preparing for) the reforms to come. In this respect, working with a strong banking partner – well aware of the changes and how they impact trading and investing companies – will be crucial. In this respect, RMB internationalisation offers a potentially major shift in the global financial markets, forcing banks to re-establish their market positions with services and products that can help corporates make the most of the burgeoning opportunities. And for the most innovative and forward-thinking banks, this shift will provide a huge opportunity to grab market share – at the expense of those that fail to plan ahead.
The story so far – a promising start
Despite the fact this is a journey half-complete, it’s worth catching our breath and establishing where we are: not least because the full liberalisation of the RMB remains work in progress. With the introduction of the second extended pilot programme for the simplified RMB cross payment scheme (SRCP) the current-account RMB can be considered near-liberalised (assuming the reforms are not reversed). The programme was introduced to reduce the extensive documentary requirements for cross-border payments, and has resulted in cut processing times and a reduction in costs – all adding to the appeal of the RMB as the currency for trade.
However, the capital account (including public and private investments in Chinese assets, and the repatriation of capital gains) remains restricted, making direct investment into mainland China still difficult compared to other emerging markets. That said, some progress has been made with respect to capital-account liberalisation. Some schemes are in place, including for investment in “Dim Sum” bonds (RMB-denominated bonds issued in Honk Kong). Companies can issue RMB debt in Hong Kong – called CNH, as opposed to the CNY of mainland China – and investors can then exchange their foreign currency into offshore RMB and invest in Dim Sum bonds.
Another measure – the RQFII (Renminbi Qualified Foreign International Investor) scheme – allows overseas investors to buy into mainland securities markets using offshore RMB deposits. This has been an exciting development, as mainland stock exchanges were previously off limits for foreign investors.
Even more exciting – for corporate treasurers at least – has been the pilot schemes extended across the entire People’s Republic regarding cross-border inter-company loans. The lifting of such restraints by the People’s Bank of China allows multi-nationals operating in China to transfer (albeit temporarily) funds between satellite operations and their parent – alleviating the issue of “trapped cash”.
With all these new measures, as well as the recent opening of the free-trade zone in Shanghai – where several new schemes are being tested, including a potential trial run of a fully liberalised capital account – the intent of the Chinese authorities is clear, even if the reforms remain incomplete. The RMB will become a key trading and investing currency, alongside the US dollar and the euro. The only question remains one of speed, although – even here – if past progress is an indicator, the RMB’s internationalisation will be something for treasurers to consider near-term rather than on the distant horizon.
What’s coming – and the need to act
Full liberalisation is clearly on the way, given the sheer number of changes underway, as well as the relentless pace of introduction. One potential breakthrough would be the flotation of the mainland CNY currency. While CNH has been allowed to float, CNY remains on a pegged exchange rate. However, many observers speculate that CNY will be allowed to float within five years – accelerating the RMB’s journey towards the top tier of global currencies.
Of course, CNY’s flotation would inevitably lead to an influx of RMB trades, resulting in fluctuations in its value on the foreign exchange market. So while adopting the RMB for trade settlement can help win clients – including smaller Chinese companies previously inaccessible to foreign corporates – as well as reduce costs, it can add to risks. Indeed, as the currency of the world’s largest exporter, those risks could be considerable for those choosing to settle in RMB.
RMB treasury management will therefore become an important area for many corporates – with RMB working capital, trade finance and cash management, as well as FX risk, all aspects to be considered and adopted.