Financial markets are so focused on the slowdown in growth in China's economy that they pay little attention to other changes that may be just as important in the long run.
Admittedly, there is nothing headline grabbing about the revised rules on the Qualified Foreign Institutional Investor Scheme (QFII), and Personal RMB Services to non-Hong Kong residents does not sound so enthralling. Nor does a Memorandum of Understanding on cross-strait currency clearing. Yet all these regulatory changes are important milestones on the road to the RMB becoming a global currency.
In July, the China Securities Regulatory Commission revised its rules to allow foreign institutions to invest in China's interbank bond market and in bonds placed privately by small and medium-sized companies. The ceiling on foreign ownership of a listed Chinese company was raised from 20 to 30 per cent. Importantly, the size limits on eligible foreign asset managers were dropped from funds of USD5 billion to USD500 million.
All this opens up China's financial markets further to foreign investors. In doing so, it allows these investors to hold more RMB assets.
Personal banking services are the remit of the Hong Kong Monetary Authority. From 1 August, it allowed Hong Kong banks to provide RMB services (accounts, cash and credit cards, loans, cross-border remittances) to non-residents. By the end of August, more than 5,700 of these had opened RMB accounts with deposits of nearly RMB400 million (USD64 million). Unlike Hong Kong residents, non-residents are allowed to buy and sell unlimited amounts of RMB, which they can use for travel, purchases or the convenience of having an RMB account.
For China to internationalise the RMB effectively, it needs to develop deeper and broader financial markets capable of absorbing large
flows of capital
An understanding on cross-strait currency clearing was reached by mainland China and Taiwan on 31 August. This will allow Taiwan to create a 'CNT' offshore renminbi currency in addition to Hong Kong's 'CNH', although we would expect the two currencies to be fully fungible. It will also allow domestic Taiwan banks to initiate business in RMB from 1 November. They could, for example, enable more local firms to invoice in RMB for their exports to the Mainland. As Taiwan has a large trade surplus with China, a pool of RMB could build up quickly.
Taiwan will join Hong Kong and Macau as the places outside mainland China that will have a clearing infrastructure directly linked to China's.
Singapore's Monetary Authority issued full banking licences to two Chinese banks with effect from 5 October, and is working on the details of RMB clearing. Singapore already has RMB deposits of about RMB60 billion (USD9.6 billion), and has the potential to grow as another offshore
It remains to be seen how effectively these new centres in Asia will compete with Hong Kong, which remains the launchpad for the RMB's
The emergence of London, with its 40 per cent share of global forex trading, as an RMB centre may be more significant. Five banks, including HSBC, launched a City of London initiative, backed by the Chancellor George Osborne, in April to make London a 'Western hub' for the RMB. On the same day, HSBC issued its own RMB bond, the first such bond in the UK and targeted towards European investors. Having planned to raise RMB1 billion, it doubled the issue size to RMB2 billion (about USD320 million) as investor demand was more than RMB4 billion.
For China to internationalise the RMB effectively, it needs to develop deeper and broader financial markets capable of absorbing large flows of capital. It also needs substantial, well-run centres of RMB trading outside of China.
In the long term, all these changes will help the RMB to take its place as a major global trade, investment and reserve currency. This will become more significant as slowdown worries ease.