Rise of the RMB – London set to become the next hub for China’s global currency strategy

RISE OF THE RMB

The RMB’s liberalisation into an influential global currency is providing   opportunities for banks and financial institutions, with London set to become the next hub for China’s global currency strategy, writes Adrian Sandiford.

At the best of times, the global financial system is a thicket of mysterious rules and nebulous regulations; those outside the industry or who lack serious portfolios usually give those newspaper pages a miss. This all changed with the 2008 global financial crisis; suddenly, finance, banking and economics dominated even casual conversations. But financial matters don’t need to be disastrous to inspire international excitement, especially to those watching China. Today, the RMB is on an historic path to emerging as a truly global currency. For British businesses, the UK’s banks are in pole position for maximum advantage.

So what’s going on? Let’s start with the basics. First, the RMB is not like other major currencies – historically used, deposited and traded only in China. Previous Chinese restrictions and controls meant the currency had few uses abroad; holders couldn’t
deposit it in a bank or even exchange it for a more versatile monetary system. This is now changing. In 2004, the liberalisation of China’s mainland currency began with the introduction of offshore RMB banking services in Hong Kong. Now, in 2012, Hong
Kong has become an internationally recognised offshore RMB hub, having given permission to allow people to trade and deposit RMB. This is great news for the global banking industry, yielding a number of opportunities for securing business and profit. And it seems as if China’s currency development will continue apace. Patrick Kwan, Managing Director and co-head of global finance and risk solutions (Asia Pacific) at Barclays, says: “There’s a strong desire on Beijing’s part to see the RMB internationalised and they eventually want it to be a reserve currency,” he says. “The desire is definitely there. From what we have heard, they very much want to see it happen; the message has been very consistent.” It’s clear that the Chinese government has a strategic priority in making the RMB both international and a reserve currency. However, it’s impossible to achieve this status overnight. As Paul Gooding, head of RMB business development (Europe) for HSBC says: “The whole internationalisation process is a three-stage path for China’s currency. First, it needs to sell itself as a trade currency, then an investment currency,
and then, ultimately, as a reserve currency.” Hong Kong colleague Candy Ho, head of RMB business development (Asia Pacific) for HSBC says that, “Hong Kong is at the head of this whole development. Because Hong Kong is politically and economically very
close to China, it is often used as a testing ground for these programmes, and we’ve already seen the trade stage happen – it’s pretty much now fully liberalised, and all the corporates in China can settle using RMB with their overseas counterparts, in both
export and import.”

Hong Kong’s next big milestone is establishing the RMB as an investment currency. Chinese and foreign companies have already started issuing bonds in RMB to raise their own money and attract investors, which is particularly exciting for British or foreign banks operating in this area. Regardless of when the RMB becomes a global reserve currency, there is money to be made, whether that be through helping companies navigate the trade settlement business, or offering the means to issue bonds at the investment stage.

But that’s not the end of the story – not for the banks, and certainly not for Britain. London is on it’s way to becoming the next offshore centre for RMB business. Hong Kong is not without international significance, but still remains under Chinese control. As the world’s largest financial centre, London’s involvement gives the RMB global credibility. Again, this offers huge opportunities for British-based banks such as HSBC and Standard Chartered; as major players in Hong Kong’s offshore RMB market, they would be big beneficiaries if a similar market took hold in the UK.

“Talks between the British Treasury and the Chinese authorities are said to have made significant progress on this issue,” reported the BBC’s business editor, Robert Peston earlier this year. The view from banks such as HSBC, Barclays and Standard Chartered is that London is well on the way to becoming the key Western hub for the RMB. While there is still some way to go, with a need to educate corporate customers on the RMB’s benefits, build up deposit-based liquidity, and attract the larger institutional investors, recent developments point to things moving in the right direction. In April 2012, for example, HSBC raised RMB 2 billion in London in the first ‘dim sum’ bond issue outside of China and Hong Kong.

There is, perhaps, one dark cloud on an otherwise bright horizon. One argument says that a key driver of the RMB evolution is the ‘appreciation story.’ This means people are now eager to hold the RMB outside of China and buy RMB bonds instead of US Dollar bonds, because they expect the currency to appreciate. Indeed, over the last few years, the RMB appreciation has been significant, rising around 4.7 per cent against the dollar in 2011. However, this year, its growth has been negligible, which perhaps becomes a threat. If people no longer think the RMB is going to go up, then holding it becomes less attractive.

But Barclays’ Kwan questions that supposition. “The fact that the RMB stopped appreciating earlier this year is interesting,” he says. “Most people look at it as a negative thing, but if you look at it from the standpoint of market development, it’s actually not
a bad thing at all. Initially you had the whole world on one side of the market. Now you have a splintered universe where some people think the RMB will continue to appreciate and
others don’t. So there’s two sides, and that’s where the swap market starts to develop, which will actually attract more issuers to the dim sum market, because they are able to swap their proceeds into currencies they want to borrow in,” he continues. “We’ve started to see people who don’t have RMB needs come to the market to raise capital, and, because swap is now available, change that RMB back into US Dollars.”

Paul Gooding at HSBC agrees. “I spoke to our private banks after the [April] bond deal. They said that, first, our customers don’t think that story is over, and, second, they looked at what’s going on in Europe and the US, and concluded that the RMB is a good diversification trade for their portfolios – they are very happy adding to their
current RMB holdings,” he says. Perhaps the final word should go to Stephen Green, head of research (Greater China) at Standard Chartered, another major player in the new financial world order surrounding the RMB, whose analysis offers a clear view of today’s state of play. “Hong Kong will be the hub for offshore RMB liquidity, but London is superbly positioned as the Western time zone, and will likely be the most important spoke as the RMB internationalises,” he notes. “It’s a big, big opportunity. RMB  internationalisation plays to the strength of any bank that combines a powerful trade platform and foreign exchange business. The experiment is based on trade invoicing in RMB, and then, once this is done, corporates, both in China and overseas, have foreign exchange and rates they’ll need to hedge,” he continues. “It’s been a real growth market for us.”

This article was taken from China-Britain Business FOCUS, a monthly magazine published by the China-Britain Business Council for its members.

The China-Britain Business Council helps companies of all sizes from all sectors to do business with China. Find out more at www.cbbc.org