Opportunities in the latest RMB developments
Due to the further liberalisation of capital market and promotion of RMB internationalisation, both onshore CNY and offshore CNH markets have enjoyed a rapid growth. Since 2009, a variety of essential financial schemes have been introduced to encourage the use of RMB, which is now the 5th most widely used currency for international payments and the 2nd in terms of global trade finance. As world’s largest RMB offshore centre, Hong Kong plays a dominant role in the progression of RMB internationalisation. In general, we expect that RMB will continue to gain momentum in three aspects: as payments of commodity trade, as an investment and de facto reserve currency, and as a tool for Chinese capital going offshore. This article outlines three game changers in the latest RMB development, with a focus on the opportunities for corporates to capitalize on China’s growing economic clout.
Since the start of RMB internationalisation in 2009, offshore CNH market has developed very fast with different kinds of products available (Dim Sum Bond and Formosa Bond, etc.). At the end of 2014, RMB deposits in Hong Kong have broken through the CNY 1 trillion with Dim Sum Bonds outstanding reaching CNY 562 billion. But in market size, offshore products still only represents 1% of their onshore equivalent (CNY loan, bonds & deposits for instance). At the end of 2014, the total amount of RMB bonds outstanding in the onshore market stood at a CNY 35 trillion, of which 92.6% was traded in the China Interbank Bond Market (CIBM). China onshore bond market is the 3rd largest bond market in the world with an average annual growth of 23% over the last 10 years.
RMB use for the payments of commodity trade, such as soft goods, metals and energy, shall increase. China’s approach so far has been to negotiate bilateral agreements for example with Thailand, Mongolia, Nigeria, Venezuela, Australia, Middle Eastern countries, for specific products such as canned fruits, food and minerals. Bullion trading has been open to international investors in the SHFTZ and oil future trading will also be liberalized soon. With Hong Kong Exchange and Clearing‘s acquisition of London Metal Exchange, we expect more payments of commodity trade will be settled in RMB, further promoting the bilateral cooperation between China and other countries in the international community.
Bridges accessing into the Chinese capital markets have expanded fivefold in the last 5 years, exceeding now RMB 1.5tn. Initially through QFII, global investors can now use RQFII, Stock Connect or 3 institutions quota. By the end of May 2015, the total RQFII quota granted has reached CNY 383 billion and more than 120 institutions worldwide have access to the onshore RMB markets. We expect more channels to open for foreign investors such as bond connect, Shenzhen link and mutual fund recognition. In addition, almost 60 central banks and sovereign wealth funds are using RMB for their global investments. Chinese A shares are going to be included in global indices like MSCI, and probably the Special Drawing Right (SDR) as well in the coming years, which will pave the way for RMB to be a world reserve currency.
China has launched a new wave of outbound investments, encouraging both public and private sectors to go offshore. Currently, China is facilitating the “One Belt One Road” initiative to consolidate the world trade ties and promoting the Asian Infrastructure Investment Bank (AIIB) to serve infrastructure projects in the wide Eurasian regions. With the “Silk Road economic belt” and the “maritime Silk Road” linking China to African coastlines and Mediterranean Sea as well as the joining of key powers such as Britain, France, Germany, and Italy into AIIB, we believe a number of countries will benefit from the initiatives and achieve a win-win situation in the long-term strategy of economic development.
International trade in RMB
Payments in RMB for current account items are fully liberalized with all trade finance products, LC discount and supply chain programs available in RMB, allowing simplified procedure and greater flexibility on trade financing conditions. Benefits include the extension of payment terms to up to 360 days, cost savings of up to 3% on import / export prices and centralisation of the FX risk at head office level.
Using RMB for capital injection and offshore financing
Foreign owned onshore entities are using RMB for raising liquidity offshore through capital injection, shareholder loan, offshore bonds and offshore bank loans since this creates a natural balance sheet hedge.
Hedging in RMB
Both onshore CNY and offshore CNH markets are very liquid, providing Interest Rate Swap, Cross-Currency Swap and FX products for hedging. Corporates can benefit from the spread of FX indices between CNY and CNH markets when doing hedge. With 24 hours a day and 5 days a week services, BNP Paribas quotes onshore prices during Asian, European and US Times for spot, forwards and options, providing cheaper execution costs for clients.
Cash management in RMB
No more trapped cash in China: multinationals in China can conduct RMB cross-border intercompany lending to offshore affiliated entities without quota restriction. Cross-border cash pooling: Multinationals registering the master entity in the Shanghai Free Trade Zone can raise fund within the cash pool structure to optimize cash management without approval and quota restriction. Centralised payment and netting: members of the same group company can conduct RMB cross-border centralised payment and netting for current account items.
RMB Competence Centre of BNP Paribas
In order to benefit from the opportunities arising from the internationalisation of the RMB, BNP Paribas set up the RMB Competence Centre in 2013, a global structure that drives the RMB strategy across all geographies and product lines. One year later, the Hong Kong Monetary Authority designated BNP Paribas as a Primary Liquidity Provider for the offshore RMB (CNH) market in Hong Kong. With the CNY 2bn intraday line, BNP Paribas is recognized as one of the major players in the offshore RMB funding market.