The Chinese renminbi remains under-used internationally despite the Asian giant's might that potential is starting to to be unlocked, with important implications for wealth managers.

Despite Mainland China’s growing economic dominance, reflected in its status as the second largest economy; the world’s biggest exporter; and the holder of the greatest foreign exchange reserves, the Chinese renminbi remains under-used internationally. However, this situation is changing, said Hang Seng bank in its recent Renminbi Monitor report, released last week.

Joanne Yim, Hang Seng ’s chief economist said the global financial crisis in 2008 acted as a wake-up call to the Mainland’s government, bringing to light the risks of over-reliance on the US dollar as a global settlement and reserve currency. Consequently, the government has been spurred to implement strategies to internationalise the currency, with the aim of eventually achieving full convertibility. For instance, December 2011 saw the introduction of the Renminbi Qualified Foreign Institutional Investors, or RQFII, programme, which allows offshore renminbi to be invested in China’s domestic securities.

As a result of the Mainland’s efforts to promote the use of RMB beyond its borders, there has been increasing international acceptance of the currency in trade settlement and investment. Banks around the world have also started to add RMB-denominated securities to their foreign exchange reserves, with Hong Kong taking the lead as a result of its first mover advantage as an offshore RMB centre.

Hong Kong

The RMB’s journey to the world began in Hong Kong - the city was chosen to run pilot programmes for offshore use of the Chinese currency, allowing its banks to provide RMB deposit, exchange, remittance and credit card services to personal customers in 2004, the first such permission granted at the time.

It seems Hong Kong is determined to remain the leading offshore RMB centre - last month the Hong Kong Securities and Futures Commission announced plans to introduce a Hong Kong-Mainland fund platform in response to the evolution of renminbi investment products and the development of asset management business.

"I encourage you to start thinking which of your products would be suitable for the Mainland market, why they would be suitable, who your target investors would be, and how your products would help them...this is because the Hong Kong-Mainland fund platform that we are building will likely be Asia’s largest and deepest," SFC’s deputy chief executive, Alexa Lam said.

According to Hang Seng, Hong Kong’s offshore RMB deposits, excluding Certificate of Deposits, could account for over 25 per cent of total deposits in Hong Kong by 2015, from less than 10 per cent at the end of 2012. This would make RMB deposits the second largest source of deposits in Hong Kong, replacing the position long held by US dollar deposits.

Internationalisation

Around the world, the RMB is already being more widely recognised as an international investment currency and the range of offshore RMB products has expanded to include deposits, bonds, equities, funds, and derivatives, for example. A few countries have started to include the RMB in their foreign exchange reserves – “a small step towards making the RMB a reserve currency,” said Yim.

For example, aside from Hong Kong, the report said Singapore is thought to hold a RMB deposit pool of about RMB60 billion ($9.63 billion) as at June 2012, London had about RMB35 billion ($5.62 billion) in 2011, and Taiwan held about RMB21.5 billion ($34.52 billion) at the offshore banking units of banks operating on the island, at the end of November 2012.

Dim sum bonds

According to Standard Chartered, offshore trading in the RMB, has doubled to at least $6 billion a day, giving investors more confidence to use instruments such as options, forwards and Dim Sum bonds (offshore RMB-based bonds).

Hong Kong’s RMB bond market has experienced rapid growth since the end of 2010 after the Chinese government expanded the pool of dim sum bond issuers beyond Mainland financial institutions, to include multinational corporations and international financial institutions in 2010, and Mainland corporations in 2011, the report said.

While Hang Seng was unable to comment, when asked by this publication about the growing appetite of private banks for such products, analysts’ reports show that private banks and other firms catering to high net worth clients have snapped up a large chunk of new renminbi-denominated debt recently, attracted by valuations and long-term potential as an asset class. At the end of last year, Nikko Asset Management said private banks are buying up to 35 per cent of new RMB-linked debt issuance.

There has also been continuing growth of the Dim Sum market as a whole since the Mainland authorities announced rules that establish a permitted procedure for remitting the proceeds of an offshore bond issue to the Mainland. The total value of dim sum bond issuance rose to RMB175 billion ($28.08 billion), with 84 issuers, in 2012, according to Hang Seng.

2013

In its outlook for 2013, Yim said the RMB exchange rate is expected to strengthen slightly this year, predicting an appreciation of 1.4 per cent for the RMB compared with the end of 2012. The Mainland authorities could also widen the daily trading band for the USD/RMB exchange rate to 1.5 to 2 per cent, from the current 1 per cent. Overall, the RMB exchange rate has appreciated over 30 per cent against the dollar since 2005, she added.

With the RMB gaining increasing acceptance globally, more companies will choose to settle their cross-border trade in RMB. The amount of cross-border trade settlement in RMB could grow by about 20 per cent in 2013, faster than Hong Kong’s total trade flows with the Mainland, the report concluded.