THE FIFTH WORLD CHINESE ECONOMIC FORUM
“Global Economic Partnerships: Realizing Opportunities, Connecting East and West”
The Renminbi in Global Markets
Setting the Stage for an Un-conventional International Currency
Tuck Seng Low
Kuala Lumpur, 4th October 2013
4 October 2013
The Renminbi in Global Markets
Setting the Stage for an Un-conventional International Currency
Tuck Seng Low
Special Adviser, Member of the Executive Board,
Swiss-Asian Chamber of Commerce, Zurich
This Paper was prepared for the session “Opportunities in Financial Services: China,
ASEAN and the World”, which I will moderate, at the Fifth World Chinese Economic
Forum “WCEF”) on 4th October 2013 in Kuala Lumpur. This session and its predecessors,
as well as accompanying research and analyses, form part of the “Financial Hubs” initiative
at WCEF, in collaboration with Asian Strategy & Leadership Institute, Kuala Lumpur, and
supported by the Swiss-Asian Chamber of Commerce, Zurich.
Already in its fifth year, a cumulative body of knowledge on the subject of finance and
investment in relation to China exists today, and deep and rewarding relationships have been
forged among participating experts and professionals at the WCEF. This series has had
strong following from ASEAN Governments, Australia, supranational institutions and global
financial institutions, among others. Imparting this knowledge to the wider public is our
This brief Paper is limited in scope and focuses on some of the contemporary issues
surrounding the Renminbi (“RMB”), an important currency in Global markets. Notably absent
are issues concerning interest structure, and exchange rate policy and mechanisms – these
cut straight into the heart of China’s developing financial and banking system.
Trade has been the obvious focal point, and regarding investment flows, there is mention but
not coverage of cash equities and bonds. On this aspect, an important trend is corporate
investment and strategic ventures overseas, especially M&A where expected deal flow is
some USD68 billion for this full year based on Standard & Poor’s estimates. There is also
another parallel dimension which brings China onto the global arena of flows – China has
accumulated reserves equivalent to some USD3.3 trillion and is the largest investor in US
Government bonds. China holds 20 percent of US treasuries, further underpinning the
inextricable and complex linkage between China and the US, and the rest of the world.
Throughout the document, the RMB is used to denote the onshore currency and where
applicable, I have used “Offshore RMB” as opposed to the conventional CNH to represent
flows and deposits outside the jurisdiction of the mainland.
For many countries, it is no longer a question of choice on whether to engage with China in
finance and financing, but “how”. The answer to “when” is “now” and the “medium of
exchange” is the “RMB”.
All views in the document are solely mine and do not represent the views of ASLI or
SACC. No responsibility is accepted for the authenticity, origin, accuracy, validity or
completeness of, or for any errors in and omissions from the information, opinions
and comments in this document.
4 October 2013
The RMB’s ascent onto the international stage is inevitable. The path is unclear
and not fully understood outside China, but within China it has been decisively
mapped. There are players and forces that shape this process along the way and
influence the “timetable”, especially markets. The RMB will creep into its own selfdetermined but limited model of internationalisation.
The two-tier market for the currency will persist especially given the exchange rate
and tightly controlled domestic interest rate regimes, and convertibility.
Participants will have to live with and innovate within this environment.
The private sector and markets will do the rest once the groundwork has been
completed. Central to staged liberalisation is the further development of Offshore
RMB rates and bond markets.
Countries that are deepening trading and investment relationships with China will
increase RMB holding levels, presently negligible, for none other than strategic
reasons if trade and investment flows are not yet substantial.
New hubs for Offshore RMB will emerge alongside Hong Kong. While London and
Singapore are anticipated to fulfil important roles, there is scope for other centres
to participate in more specialised areas.
Three vital ingredients conspire to propel the Renminbi (“RMB”) onto the world stage as a
key international currency. These are:
1) China’s position today as the second largest economy and the largest trading nation
in the world;
2) The deepening trading and investment relationships and links forged at breakneck
speed by China, led primarily at the early stages by State-owned Enterprises,
stretching from far-flung nations to the world’s largest trading blocs, i.e. the European
Union and the US; and
3) Increasing investment into China from and substantial onshore operations conducted
by foreign enterprises.
The course to RMB “internationalisation” however is not straightforward. There are
challenges and other impediments that make this process a staggered one; in my view, a
phenomenon that can be best described as “creeping” internationalisation. China’s rate of
growth, the sheer size of its economy and its global reach are unparalleled. How does the
country with this unique set of features in today’s environment manoeuvre the management
of the currency offshore in a manner consistent with a global economic force?
Indeed a lot has already taken place to internationalise the currency within a compressed
timeframe. Today, the RMB has jumped into the top 10 of the world’s most traded currencies
and ranks No 9 (see Table 1 below). While it is not for anyone to say how fast change
should happen or what needs to be in place, a trajectory has been set and there are steps though not in any prescribed sequence or degree of implementation - for the currency to
deepen as well as extend its reach. Handling this magnitude in drip-feed fashion defies any
classical approach, and many experts will be disappointed with their extrapolations. Public
policy, financial (as well as economic) reform within China form a key part of the formulation
4 October 2013
and formation process, but the course in the “open seas” of currencies is unchartered and
outside the full control of authorities.
Here, market forces and international practices prevail where shocks and knocks, and the
multi-dimensional (and multi-lateral) management thereof, are integral to a fully-fledged
Currency Distribution of FX Turnover: Top 10 Currencies
(Percentage share of average daily turnover in April
Source: Bank for International Settlements, Basel. Based on April 2013 Figures.
Offshore RMB today
Today, Offshore RMB is used primarily for:
1) Trade settlement
2) Investment flows
3) Reserve management
It is inevitable given the weight of trade with China that transactions are increasingly settled
in RMB. In mid 2009, a pilot offshore market for selected groups1 was launched by the
People’s Bank of China (“PBoC”). Two years later, on the back of the success of the
scheme, reflected by the rapid expansion of coverage to all mainland provinces and
broadening of international counterparties, all Chinese importers and exporters were eligible
to settle in RMB. This heralded the birth of a new currency in global trade.
To-date, the volume of trade driven RMB flows is small in global terms2 but growing rapidly.
Offshore trading and clearing of RMB has been led by Hong Kong, and a milestone was
reached in May this year when the clearing of Offshore RMB in Hong Kong exceeded the
amounts settled in HK Dollars. Tiny though this may be, this specific remit falls within the
comfort zone of current policy, and alongside increasing global exposure to the RMB for
trade settlement, “basic” tools of forex management will expand in scope3. This will roughly
develop in tandem with the broadening of investment flows, and indeed I would argue that
investment flows will be the driver of the innovation that is anticipated, especially in the
nascent fixed income space.
Mainland Designated Enterprises (“MDE”s), selected non-MDEs in Municipalities and Hong Kong counterparties.
One percent at best currently (Various sources in the market).
3 Currently, most hedging is short-term, ie forwards and options, mainly in the USD-CNH pair. CME has launched CNH Futures in 2013.
4 October 2013
The initial framework for trade settlement was targeted to China’s regional trading partners,
especially the ASEAN + 3 constellation, and further along the line, developing nations in
Africa and Latin America where trade and investment patterns deepened at a pace no one
had anticipated. As the European Union (which excludes Switzerland) is China’s largest
trading bloc with roughly EUR 1 billion a day in trading volume, initial reticence will gradually
pave the way to a greater level of use. The significance of this relationship cannot be
belittled as it represents one of the largest blocs of bilateral trade flows in the world. It should
be noted that this position is expected to be overtaken by the US in 2013 on the back of
trade restrictions and a tit-for-tat dispute in dumping practices (recently solar panels versus
wines) between the EU and China.
As for Switzerland, the country is China's eighth-largest trading partner in Europe while
China is Switzerland's largest trading partner in Asia. In July this year, China and
Switzerland signed a Free Trade Agreement which will become effective next year
underlining USD20 billion of trade between the two countries. This is the second FTA in
Europe after Iceland, and it emphasises the importance of the relationship between the two
2002 marked in earnest the start of liberalisation, when Qualified Foreign Institutional
Investors (“QFII”s) were permitted to trade in “A” shares denominated in Yuan on the
Shanghai and Shenzhen. The first two houses to qualify as a QFII were UBS, being the first,
and Nomura Securities in May 2003. 10 other financial institutions joined the list that year. A
cap of USD10 billion was placed on the programme initially, then trebled in 2007 and more
recently (April 2012) was raised to USD80 billion. In July this year, the China Securities
Regulatory Commission announced a further increase to USD150 billion, but importantly plans
are in place for further broadening the programme.
A key parallel development to QFII was the establishment of the offshore RMB QFII programme
in 2011 with an initial quota of RMB20 billion. This status was granted to Hong Kong subsidiaries
of mainland fund management and securities firms and enabled investors to use offshore RMB to
invest in mainland securities, ie. bonds and equities. The quota now stands at RMB270 billion
and the range of offerings has expanded to include RMB denominated exchange-traded funds
(“ETF”s). Some foreign investors in the Chinese market have already been participating in ETFs
and other related instruments through synthetically generated exposure.
While most of the major earlier initiatives undertaken by the various bodies have been
directed at the equity markets, the real moves that need to take place will be in interest rates,
as mentioned. This cuts straight into the core of RMB internationalisation. Convertibility
aside, to engineer internationalisation without rates is akin to baking a cake without flour. I
keep returning to the theme of broadening and deepening the interest rate profile through a
regime of calibrated liberalisation. There are many layers to this process and programme –
this merits deeper analysis and discussion at a separate forum.
At this juncture, I am happy though to mention that a few months ago, a relatively smaller
Chinese bank issued the first Basel III compliant bond sized at RMB1.5 billion (USD240
million) with a 10 year tenor. This deal was led by Credit Suisse, another Swiss first.
Can a tightly controlled currency fit the conventional criteria relevant to being a reserve
currency? The answer depends on who you are talking to, specifically which Central bank or
groups of Central banks. Strictly speaking, the RMB will not qualify as a global reserve
currency until, among other criteria, full convertibility is in place – this will not happen for a
while. As a consequence, RMB holdings cannot be counted as official reserves. Does this
matter for now? Probably not and ticking the prescribed boxes is not the prerogative; indeed
we should be adding new boxes as we redefine what we really mean by a reserve currency
4 October 2013
in a fundamentally changed credit and Sovereign risk environment. The Yen meets and has
met all the requirements since the 1980s and, in practical terms, has yet to become truly
global in usage.
In Asia where deep trading relationships and a myriad of other linkages exist, the motivation
for holding RMB in central banking coffers, reserve currency or not, is far greater, and is
consistent with the long term vision of deepening engagement with China in commerce.
Central to this is cross-border trade and investment, and clearly while certain moves are
seen to be symbolic at present, the reality is that “dedicated Offshore RMB” is a strategic
Sovereign objective for nations engaging with China in this manner. The layer of greasing
trade and investment is where international financial institutions and corporates play a vital
role, but it is where Governments prepare the surface of the playing field.
Six central banks have already been admitted into the QFII programme, while others have
entered via the interbank bond market, the latter since August 2010. Malaysia, Nigeria and
Chile are reported to hold RMB securities, but clearly, the universe of countries is larger
especially among developing and emerging nations. There is no quota imposed on foreign
Central banks and Sovereign Wealth Funds within the QFII programme.
Notwithstanding such holdings, a welcome set of initiatives is the development of bilateral
swap agreements (“BSA”s) between China and an increasing number of countries. The first
set of such arrangements originated from the Chiang Mai Initiative and involved ASEAN + 34
nations. While the initial bilateral agreements did not appear to be meaningful in scale, they
addressed the aim of regional strategic cooperation and provided scope for a widening
programme of reaching out to a selection of trading partners; furthermore the significance of
these BSAs came to the fore during the Lehman crisis and its aftermath, when new BSAs
were concluded (with S Korea, Hong Kong and Malaysia) to provide standby liquidity in the
In terms of currencies applied in BSAs, initial agreements were struck in US Dollars but
today RMB is the currency generally used. There are also variants to the original BSAs and
some are one-way, others bi-directional.
Bilateral Swap Agreements with China
(Largest Agreements in excess of RMB100 bn)
As at the end of 2012, there were BSAs outstanding with 16 countries. Significant
newcomers in 2013 were Australia, Brazil and recently the UK (see Table 2). Indonesia
expects to sign a new agreement which replaces the former RMB100 billion line that expired
in March 2012. Banque de France has signalled its intention to enter into an agreement with
PBoC. Among these, the most significant is the UK.
ASEAN represented in this context by Thailand, Malaysia, Philippines and Indonesia. The “3” comprises Japan, S Korea and China.
4 October 2013
The muted official announcement by PBoC (below) disguises the true ambition of the City of
London, and the intention of China to establish a key centre for offshore RMB outside the
“In recent years, the RMB business has grown on the London market. The establishment of a
bilateral local currency swap arrangement between the PBC and the Bank of England will
provide liquidity support for the development of the London RMB market, promote the use of
RMB in overseas markets, and facilitate bilateral trade and investment. The signing of the
bilateral local currency swap agreement marks the new progress in the monetary and
financial cooperation between the PBC and the Bank of England.” People’s Bank of China
Presently, an estimated RMB680 billion (USD110 billion) pool of deposits is domiciled in
Hong Kong, followed by Singapore (RMB60 billion) and London (RMB35 billion).
Hong Kong has played a pivotal role in RMB’s internationalisation process. It held a
privileged position at the outset providing all of the infrastructure necessary to spawn the
development of Offshore RMB including importantly “soft” but vital assets such as qualified
human resources, a formidable legal and accounting regime built on established best
practice, a bilingual environment with English being the principal language for international
business, a mindset of global connectivity among other factors. Proximity to the mainland
provided the necessary comfort. In 2010, Hong Kong was granted “Offshore RMB Business
Centre”. What this meant was the ability by the “Centre” to provide deliverable RMB for the
first time, and kick-started rapid growth in RMB trade settlements and deposits.
Some pundits take the view that once the test bed has done its job, other centres in China,
especially Shanghai, and indeed international centres, will supplant its pre-eminence, or for
that matter water down its role, notably Singapore in Asia and London in Europe. This will
not happen for some time to come because of the sheer weight of China’s trade conducted
with (and through) Hong Kong and its natural position as the stepping stone for Chinese
financial institutions going abroad, and of course their accompanying key personnel.
What will happen is that in selected areas of activity, new pools of expertise will be rooted in
other financial centres. Elsewhere in Asia, Taiwan and Singapore have underlying
respective strengths favouring their potential roles as hubs.
There is no veiled disguise in London’s quest to lead the charge in Europe, if not globally in
selected areas. The moves are well-orchestrated, contrary to the usual self-deprecating
style, spurred by the confidence that came from winning the Olympics city race for 2012.
And does it matter if UK banks and financial institutions are now a far cry from where they
once led? Not really and it is based on the “Wimbledon Strategy” – provide the best venue,
facilities, services and thrive from running the courts without having national champions (until
Andy Murray came along to trump Roger Federer). The City of London has brand presence
and along with it the depth in offshore institutional markets in global fixed income, forex,
derivatives and a plethora of areas in financial services. And accidents happen too. It should
not be forgotten that US Tax equalisation created the largest offshore bond market in London
and Glass-Steagall, before it was repealed, brought the biggest pool of talent into the
derivative markets in London, originally in currency and interest rate swaps, to create the
perfect ecosystem to serve global markets.
What about the mastery of “Roger Federer”? Apart from the obvious strength in private
wealth management, risk management and insurance, Switzerland has global clout in trading
commodities, out of Geneva and Zug, as well as an industrial and logistics base second to
none for a country with a population of eight million, a shade over Greater London’s size.