Irrespective of location, the rise of the renminbi (RMB) internationally will have far-reaching implications. It will transcend national borders. It will exert a substantial impact on global trade and investment flows. It will influence how businesses, investors and regulatory functions operate in the decades to come.
Based on the economic road map outlined by China’s policymakers, we expect the RMB will become a global trade currency and a global investment currency, before finally becoming the next global reserve currency. The recent announcement that China and Japan will start direct trading of RMB and yen to boost trade ties is consistent with this master plan. In our opinion, direct trading of the currencies between China and Japan demonstrates not only the growing clout of the RMB, but further reinforces the emergence of the former on the international stage.
Establishing a second offshore RMB hub will also leverage London’s standing at the largest and most liquid FX market globally
In HSBC’s view, quantifiable progress has already been made, irrespective of the recent RMB-yen announcement. In 2011 alone, approximately 9 per cent of China’s trade with the rest of world was settled in RMB (total trade for 2011 at USD3.5 trillion). By 2015, we estimate that over half of China’s trade with emerging markets (USD2 trillion) will be settled in RMB. But as interest in the RMB will only intensify, the currency will require deep global support and a broad offshore network and infrastructure.
Policymakers, financial institutions and businesses acknowledge that in order for the RMB to become a major component on the international stage, its offshore development must move beyond Hong Kong.
In May, representatives from government and finance converged on the territory for the Hong Kong-London Forum to discuss this future development, to enhance the international liquidity of the renminbi and to explore synergies by improving links between the two financial centres.
While this is a positive development for the RMB internationally, many are asking what the forum will mean for Hong Kong’s status as the leading offshore RMB centre. Understandably, some commentators in the market are concerned that the potential establishment of London’s offshore business will be to the detriment of Hong Kong’s leading status.
This could not be further from the truth. London’s potential development as an offshore RMB hub will only serve to complement Hong Kong’s position. Hong Kong’s leadership position will not be threatened, particularly as no other market has received the level of Chinese government endorsement as Hong Kong has through policy directives such as the 12th Five-Year Plan.
The launch of the first RMB bond listed in London
In 2012, Hong Kong stands alone as the world’s premier offshore RMB centre for a number of reasons. Firstly, the market is the most developed globally in terms of offshore RMB products and services available. For example, RMB trade settlement, one of the first areas liberalised, has increased in Hong Kong from RMB369.2 billion aggregate in 2010 to RMB1,914.9 billion aggregate in 2011, based on Hong Kong Monetary Authority figures. So far this year, RMB571.2 billion has been settled.
Hong Kong’s offshore RMB market also provides an unmatched depth of capital markets and financing products including RMB-denominated fixed income and equity products, RMB loans and overdrafts. From a foreign exchange perspective, at the end of 2011, daily turnover on the spot and forward market was around RMB1 billion and RMB1.8 billion, respectively.
Secondly, Hong Kong is easily the largest RMB market measured by liquidity outside of mainland China. In 2011, RMB deposits in Hong Kong rose 87 per cent year-on-year to RMB588.5 billion although declining by 2.1 per cent month-on-month in March 2012. However, we believe that this decline is largely due to the opening of additional RMB channels and the onset of more normalised growth patterns.
Another solid example of the depth of Hong Kong’s RMB liquidity pool is found in the rapidly emerging offshore RMB bond (Dim Sum) market. In 2011, gross issuance of Dim Sum bonds was RMB189.3 billion, representing over 300 per cent year-on-year growth. At the end of April 2012, gross issuance totalled approximately RMB100 billion, on track to hit our end-of-year target of between RMB260-310 billion.
So how does this currently compare with London? As of April 2012, aggregate RMB deposits in London stood at RMB109 billion, but are forecast to grow rapidly. However, London’s retail RMB market is not expected to ever approach the size of Hong Kong, given the latter’s special status within China.
While this base is incomparable to Hong Kong, London will serve as a critical component in the overall RMB internationalisation picture in other areas. For example, London has and will continue to play a leadership role in facilitating RMB payments in Europe, which now accounts for roughly 7 per cent of global RMB payments according to our estimates.
Additionally, establishing a second offshore RMB hub will also leverage London’s standing at the largest and most liquid FX market globally. The City of London estimates that roughly 26 per cent of global offshore RMB spot market is already in Britain’s financial centre.
Furthermore, expanding the range of offshore RMB markets will enhance pricing efficiency and drive product development. The development of a broader RMB product range will rely heavily on Hong Kong’s experience, and London has already accepted its willingness to learn from Hong Kong’s expertise.
In other words, the global RMB infrastructure will only be strengthened by bilateral agreements such as the Hong Kong-London Forum. As RMB internationalisation will be a staged process, development of London will complement Hong Kong, not challenge its leading status.