Economics & Finance
• 6 minute read

Getting the Feet Wet on Trading in RMB

Chan, Christopher(陳兆倫)

What kind of groundwork have movers and shakers in the finance industry done to facilitate the transition of RMB into a fully convertible currency?

By Louisa Wah Hansen

In preparation for the full convertibility of the renminbi (RMB), what kind of groundwork have the movers and shakers in the finance industry done to facilitate the transition? How should investors and companies doing business in China prepare for the eventual internationalized currency?

When it comes to supporting and internationalizing the Chinese currency, one of the most active agencies is the International Finance Corporation (IFC), a member of the World Bank Group. IFC has been playing a pioneering role in using the Chinese domestic capital markets to provide financing in order to support the transformation of the RMB into a fully convertible currency.

Philippe Ahoua, principal financial officer of the IFC’s Treasury Client Solutions, is responsible for all the treasury activities of the organization in the Asia-Pacific region and has over 12 years’ experience working with the China capital market. He stresses that having a fully convertible RMB is a must if the currency were to become a world reserve currency.

“It’s not a matter of choice; it’s a prerequisite,” he says. “The size of the Chinese economy will become the world’s biggest in 20 years. The currency of the currently second largest economy of the world thus has to be convertible some time in the near future.”

Over the past nine years, to get investors familiar with the currency, the IFC has been gradually issuing RMB-denominated financial products in China as well as offshore markets such as Hong Kong.

As early as 2005, IFC was the first issuer of RMB-denominated bonds in the onshore “Panda Market” in China. In 2008, it was one of the first multilateral organizations to issue “Dim Sum bonds” in Hong Kong, the first-ever and biggest RMB offshore market. The proceeds of IFC’s first Dim Sum bond issue , according to Ahoua, were invested in a renewable energy company, Shenwu Thermal Energy Technology Co. Ltd.

In 2011, IFC was the only multilateral to ever sign a National Association of Financial Markets Institutional Investor agreement with Chinese banks—the China Development Bank and the Export-Import Bank of China—which allowed it access to the domestic Chinese exchange markets so it could start to lend RMB to borrowers.

After that, IFC pioneered the issuance of RMB discount notes in the Dim Sum market, to provide short-term RMB financing to trade projects by Chinese companies who conducted business overseas as well as overseas companies doing business in China.

At the end of 2013, through the People’s Bank of China (PBOC), IFC received a RMB 12billion quota to invest in the domestic interbank bond market. And so far this year, the organization has issued RMB bonds on the London Stock Exchange, at RMB 1 billion each. The investors included commercial banks, central banks and corporations. The majority of the investors originate from outside of Asia—55 percent were from Europe, the Middle East and North Africa; 37 percent from North America and Latin America, and 7 percent from Asia.

“The whole idea is to issue RMB in a center that is closer to other investors,” explains Ahoua. “We have sold to some African and Latin American accounts, so when they wake up, the London market is still open.”

“It ticks all the correct boxes to establish the RMB as an international investment currency,” he continues. “Eventually the RMB is going to become a major world reserve currency. It has already surpassed many currencies to establish itself as a trade-settlement currency. Many offshore financial centers want to participate in this business as RMB is going to play a more important role on the world stage.”

For RMB to be fully convertible, Ahoua says it will take a bit of a mindset change. “But what I’ve seen in the past few years from the various regulators in China, it all seems to point in the right direction.”

He cited China’s Central Bank’s recent measure of widening the administrative trading band so as allow more room for the currency to appreciate or depreciate in value. Although this has led to greater volatility, he explains, it is a process that will lead to the full liberalization of the currency. “The PBOC took out the cap on the lending rates, for example,” he says. “Eventually it will take out the floor on deposit rates. You’re going to see incremental changes every few months, so eventually the currency will be fully convertible. Nothing is going to be done in one shot but rather, gradually.”

“Investors and companies are already prepared for [the internationalization of RMB],” Ahoua says. “Through various schemes, such as the RMB QFII schemes, market access, offshore RMB bonds, the Shanghai Free Trade Zone and so on—investors are already exposed to the currency, getting their feet wet and prepared for the day it is going to be fully convertible. So by the time the capital account is fully open in China, the news itself won’t be a big deal.”

Christopher Chan, an adjunct finance professor at CUHK Business School says that such a gradual process of RMB’s internationalization is a smart and deliberate exercise by the Chinese government to avoid the scenario of hot money rushing into China, as what happened in 1997-1998. Chan has worked in the finance industry for more than 20 years and has closely participated in the offshore RMB business since its inception,

“The RMB offshore market helps to slowly transition the opening of the onshore RMB market in China,” he says. “The offshore market is a controlled experiment. In fact, Hong Kong is a parallel market to the onshore market, but here, RMB is freely traded, which means anyone in the world can buy and sell RMB. In that sense, it has reached the goal of being a freely convertible currency. Of course, from a freely convertible currency to a fully convertible one, there is still a distance, as the capital account in China is not totally open. Nonetheless, this is a big step forward, as the demand and supply of RMB in a free market such as Hong Kong gives a fair indication of what the onshore rate would be.”

What do companies need to be vigilant of in the prelude to full RMB internationalization?

Ahoua’s advice is to keep a closer eye on the regulatory framework. “Everybody’s got the same objective, but how to get there is viewed differently depending on the type of agency you work with,” he says.

According to Christopher Chan, companies should increase their understanding of the restrictions surrounding the use of RMB in trade. “Foreign companies have a lot of question marks,” he observes. “They need to dedicate more time to understand RMB settlements. They can contact commercial banks, such as HSBC, the Bank of China, Hang Seng and Standard Chartered—these are the most advanced in terms of RMB knowledge. Many banks also have departments that handle clients’ queries on how to do settlements and investments in RMB.”

As for whether or not foreign companies should set up shop in the Shanghai Free Trade Zone to get a head start on making use of the convertible RMB there, he advises them to do a cost-benefits analysis first and set up a dedicated team to understand and keep up with the developments of the RMB.

What about RMB as an investment tool?

In Chan’s view, China has a long-term goal of making RMB a reserve currency. As the currency is increasingly being used for settling commercial transactions, there is also a need for offshore accounts to hold more and more RMB, he says. Consequently, offshore RMB investment products will become more developed and sophisticated.


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