Talking Heads: RMB internationalisation

As the Chinese Government continues its phased internationalisation of the renminbi, financial institutions are evaluating their strategies. Daily News at Sibos asked some Sibos delegates what financial institutions need to do to take full advantage of the opportunities offered by RMB internationalisation.

Nancy So: Asia Pacific head of cash management for financial institutions sales, global transaction banking, Deutsche Bank

In order to take advantage of the opportunities offered by the internationalisation of the renminbi (RMB), financial institutions need to keep abreast of the ongoing regulatory changes around the RMB, build a flexible infrastructure and provide customised RMB services to their clients. By doing so, they will be able to capture the growing RMB payment corridors across the Asia Pacific region and create value for their clients’ trade and investments in China.

A deep understanding of the ongoing liberalisation of China’s financial systems and its currency is also essential to identify and capitalise on cross-border business opportunities.

People’s Bank of China’s (PBOC’s) undertaking to develop the China International Payment System (Cips) clearly demonstrates the country’s commitment to developing an efficient real-time gross settlement infrastructure for cross-border payments that is compatible with international payment systems operating beyond Asian trading hours. This new system could act as a catalyst for the use of the RMB as an emerging currency for international payments.

With these enablers in place, financial institutions will need to provide customised RMB solutions in areas such as trade settlement, FX risk management, commodities futures, or the listing and depository of RMB-denominated securities and bonds. At the same time, financial institutions should help their clients to understand the advantages of using the RMB as a currency for bilateral trade and assist them in deploying the currency as part of their international treasury management and investment strategies.

A key component in this process will be the involvement of global clearing service providers with a strong track record in offering RMB products and services, global markets expertise, as well as a focus on enabling their clients’ success.

Madhavan Ramaswamy: global head of product for banks, transaction banking, Standard Chartered Bank

About 15 per cent of China’s annual trade was redenominated to the RMB in the first half of 2013 and this is expected to increase to around 20 per cent by 2015. As trade growth continues to shift from the West to the East, USD commercial payments to and from China will continue to redenominate to the RMB.

In this context, financial institutions as intermediaries will need to look hard at their capabilities in this space. Indeed, several FIs have recognised how this trend creates an opportunity to capture additional market share and deepen client relationships.

However, financial institutions that neglect the RMB do so at their peril as trade with China will continue to grow in volume and value. However, not every financial institution will be a winner. The four key pillars that will enable growth in this market and satisfy the changing demands of clients will depend on the ability to:

• Develop a strong on the ground presence in China and other offshore RMB markets to enable the smooth implementation of cross-border transactions;
• Stay at the forefront of regulatory updates and market developments, with continued involvement in various industry forums;
• Offer advice, solutions and liquidity to support RMB product offerings which are complemented with in-depth experience of similar transactions in other currencies; and
• Participate actively in the evolving clearing infrastructures in China so as to be able to efficiently settle RMB transactions across the country in a cost effective manner.

Frederick DiCocco: head of sales and relationship management, Apac, BNY Mellon treasury services

It’s been almost four years since China introduced phase one of its RMB Cross-Border Trade Settlement program in December 2009. And while the currency has steadily climbed in world payment currency rankings, along with China continuing to loosen regulation, demand for RMB products has stagnated somewhat with close to half of current service providers suggesting volumes are lower than expected. So what does this say in terms of opportunities for financial institutions to develop product and provide services to their client base?

In reviewing RMB market activity, there are signs that indicate demand for RMB will continue to rise but more likely at a gradual pace rather than the aggressive growth rates originally projected in 2009.  The initial activity was partly driven by anticipated aggressive RMB appreciation against the USD. But while RMB exchange rates have stabilised, offshore deposits, an early proxy for growth in RMB internationalisation, have continued to grow with the RMB gaining in popularity for trade settlement.  As such, trade finance, designated by the Chinese Government as the first stage of RMB internationalisation, continues to be the primary driver of the increase in RMB payment activity and presents opportunities for financial institutions with development of RMB services.

As of May 2013, RMB was ranked by Swift’s RMB Tracker as the 13th most active currency, up from 20th position in January 2012.  It recorded a market share of 0.84 per cent, ahead of the South African rand, Danish kroner and Russian ruble and just behind the Hong Kong dollar. More telling is that the value of RMB payments increased by 24.1 per cent compared to 1.3 per cent for all currencies. China remains the largest exporter nation, surpassing Germany in 2009 for the lead spot. Primary foreign market destinations for China exports are the European Union bloc, the US and countries in the Association of South East Asian Nations group. For banks in these markets, providing reliable payment services to their corporate or consumer clients for settlement to China will be a key strategic priority and a critical component of a competitive cash management offering.

Other factors boosting the opportunities presented by RMB denominated trade are favourable financing costs and supplier discounts due to reduced foreign exchange risk. As a result, it’s forecasted that more and more China suppliers will want to be paid in RMB rather than USD. And facilitating trade settlement is the increased use of RMB denominated letters of credit (LC). While global growth in LC issuance is relatively flat, it remains an instrument of choice in Asia with the number of RMB LCs in particular, up significantly over the past few years.

Recent changes in regulations of RMB cross-border settlement will further increase product demand. In July 2013, the PBOC removed a host of restrictions related to documentary review of underlying trade transactions to simplify settlement. The PBOC announcement also included new measures to further promote offshore activity including extension of the cross-border intercompany loan pilot scheme.

Various market studies suggest that banks, globally, remain in varying degrees of development with respect to their RMB product offering, with estimates of 40 per cent of banks providing some level of service. Of those not providing RMB services, about half indicated they plan to do so in the near term. The extent of services offered will also vary but a focus on trade finance and remittances will most likely result in the best return on product development. An expansion of services can include management of RMB liquidity in response to higher deposit levels plus growth in FX, derivative and capital market instruments.

While the RMB remains a relatively small percentage of overall cross-border trade and payment settlement, it’s forecasted to account for 30 per cent of all Chinese trade settlement by 2015. And while more regulatory reform and full convertibility will be needed to rank it on par with the USD and euro as an international reserve currency, evidence suggests that the RMB will an important currency in the years to come.

Christian Behaghel: head of global transaction banking, Société Générale global transaction banking

According to Swift’s RMB Tracker, RMB ranks as the 11th world payments currency as of June 2013 (compared to the 20th in January 2012). This rapid growth could easily represent a threat for non-Chinese banks. However, banks can also choose to take advantage of the RMB liberalisation if some key milestones are implemented.

First, they should be building settlement and payments capabilities through the opening of RMB clearing accounts with banks for both offshore and onshore markets. Selecting the right provider that will share in-depth market knowledge is essential.

Second, banks must implement RMB banking solutions and deploy them across all main markets to assist domestic corporate clients in their business development with Chinese partners (FX, trade, treasury management, financing, and investment). This goes with the adaptation of some existing products to support CNY ISO code.

Dedicated compliance and legal departments in both mainland China and in the main RMB offshore centres should be set up in order to be constantly updated on RMB policies and their implications on banking businesses.

Banks should also dedicate significant efforts to communicate internally and with clients on policy changes and opportunities. SMEs, in particular, may not have access to Chinese information resources and may rely heavily on their banking partners to change their trade settlement patterns. Adopting RMB in their business negotiations allows clients to win competitiveness towards their customers and suppliers.

Yiting Shen: global RMB manager, Citi transaction services

The internationalisation of the RMB presents numerous opportunities for financial institutions, in particular the banks that have the network, capabilities and relationships in China.

Banks can provide the expertise and experience in developing the RMB financial infrastructure. This would include clearing and settlement systems, trading and investment products; deep understanding of the regulations, the market and the client to provide the most efficient and effective solutions. Within the banks’ networks, it is important to have close collaboration across borders to deliver up to date information, best practices and consistent services.

Banks can focus on specific corridors and regional flows based on their strength. Swift’s analysis has shown that almost 45 per cent of the RMB cross-border flows come from Europe and almost 40 per cent are intra-Asia. The intra-Asia flows, in particular the Hong Kong and Taiwan corridors, have grown significantly (over 400 per cent) in the past 12 months. Most of the European corridors are fairly concentrated with dominant players and smaller number of banks participating.

Banks need to offer a more holistic solution on RMB, bundling cash, trade and FX. Most banks have separate departments on cash, trade and FX to handle muture currencies such as USD and EUR. In the RMB instance, clients often want all, thus to break the organisational barriers for holistic client solutioning could be a key to win clients.

Banks will want to have RMB liquidity access to help clients to settle across borders in RMB between China and offshore centres through RMB nostro accounts. It will be very important for banks to find a smooth clearing channel for RMB business. Banks will want to choose correspondent banking partners that not only have a global network, but can also access a sizeable RMB liquidity pool and a meaningful presence in the country to enable their financial institution clients to continuously tap liquidity and get money into and out of China.

Banks should also proactively work with Chinese regulators, who are open to experiment with structures, such as cross-border treasury and liquidity solutions. It is our opportunity and responsibility to share our expertise in these fields to support the development of the RMB internationalisation as capital flows are being gradually opened.

David Westbrook: general manager Hong Kong and China region, international securities processing solutions, Broadridge Financial Solutions

Offshore RMB in Hong Kong, known as CNH, naturally benefits from the largest Chinese cross-border outflow and has developed trade settlement volumes from circa 370 billion to 2.5 trillion in the three years to end 2012 alone. This has created a greater liquidity pool for collateral and funding purposes. Along with this, the significant increase of dim sum bond issuance (RMB-denominated bonds issued outside of China) is also a strong sign of the additional demand for Chinese names and RMB currency exposure for foreign investors that can more readily invest in the HK market, rather than within the restrictions of the Chinese domestic market.

China has further extended cross-border RMB flows with the creation of offshore RMB in the form of CNS (Singapore), CNL (London) and CNT (Taiwan). These enable China-based firms to offer international issuance and thus be an accessible vehicle for overseas firms seeking to hold RMB investments on their books. The offshore RMB markets continue to mature, not least in Taiwan where regulators increased the pace of relaxing ownership rules for wealth managers. This has been instrumental in moving them into fourth place in terms of RMB volume, just behind London and Singapore. Hong Kong, however, remains the largest market and a clear priority for firms in Asia, with circa 70-80 per cent share.

Firms seeking to capitalise on the offshore RMB need to be in a state of readiness, with efficient infrastructure to process RMB-denominated trades in potentially multiple centres and the ability to clear and settle those trades via the appropriate CSD and custodian network.

RMB internationalisation requires a robust post-trade platform that can operate on both a multi-entity and multi-currency basis. For global firms it also brings into focus the opportunity to offer settlement for overseas affiliated groups investing in RMB transactions and the need for transaction matching and reconciliations across both firm- and market-side elements of inter-company trades generated.  Reference data support is also vital for RMB-denominated products as they become available, for example, for bullet bonds, medium term notes, CDs and even Sukuk (Islamic financial certificates).

New products being added to the RMB market, such as futures and options, will assist firms in their hedging of exposure, but this further highlights the need for post-trade operational efficiency to manage positions, cash flows, fees and settlement standards in order for the front office to widen the horizon of their clients to these new and evolving markets.

Donald Workman: executive chairman, RBS Asia Pacific

The RMB market has understandably not been the first choice for companies that can easily transact, settle trades, raise funds and manage their supply chains in currencies such as EUR and USD. However, being put off the RMB by tight regulation, new processes, a shallow investor pool and easy funding elsewhere ignores the clear strategic rationale for getting in to China’s capital markets.

The Asian marketplace is far bigger than Europe and China is the region’s engine of growth. It may make sense to set up the capabilities to finance and fund projects in China’s currency and to pool money there, rather than repatriate it.

The avenue to do this is to establish RMB transaction service capabilities, such as current and savings accounts and cash management tools, as well as trade finance capabilities, such as exchange rate, money market and investment products. Selling RMB bonds is also a way to take advantage. China’s newly acquisitive consumers are discovering credit as a way to pay for big ticket items and Asian subsidiaries of Western companies may need access to sources of term RMB to finance that demand. It is also a smart diversification tool. As record low yields in USD and EUR start to shift, new sources of funding can be tapped.

China’s more intense regulations and often rigid processes have of course been a deterrent for many companies. This is slowly, but surely, changing. In July, the PBOC announced the removal of a cap on cross-border, inter-company loans. This means corporates can directly approach their banks to extend cross-border RMB intercompany loans to their overseas parent or affiliates without regulator approval. To do this, lenders need to open a designated RMB account to receive loan repayments.  This is one example of how as the RMB market develops and further liberalisation of China’s foreign exchange takes place, taking the steps now to establish RMB capabilities will help institutions familiarise themselves with the regulatory environment, build a name and send an important signal of their commitment to the Chinese market.

Dianne Challenor: head of transaction services, Asia Pacific, JP Morgan

As the internationalisation of the RMB continues to gather pace, a multitude of ongoing industry developments continue to push global, regional and domestic financial services providers to more deeply consider how they can help their corporate clients build the currency into their operations.  Driven by a surge in commercial usage of the RMB – in January 2013 close to 20 per cent of China’s trade was settled in RMB compared with around 10 per cent in January 2012, according to the CEIC – financial institutions are peddling fast to stay ahead of the corporate client curve, particularly with market expectations suggesting that up to 35 per cent of trade with China will be settled in RMB by 2015.

As financial institutions around the world grapple with the rise of the RMB, there are several key considerations that should be observed and acted on to ensure a financial institution is ready to act on behalf of its corporate clients. First, there needs to be a top-down approach with senior management driving a bank’s RMB strategy, which should begin with establishing the right architecture to integrate the currency into their existing cash and payment solutions. Depending on a bank’s geographic coverage model, thought needs to be given to potential banking partners that can extend and enhance their services with China and other markets around the world, prioritising speed and accuracy of payments and the ability to scale up processing, accounting, clearing and reporting capabilities in-step with a corporate’s growth. A fundamentally important requirement will be the ability of a partner bank to deliver real and actionable insights around regulatory change and reform.

While each bank is different in terms of how it plans to serve its corporate clients, all banks share a common objective – delivering value to their clients. And importantly, by being ready for the RMB today, a bank can ensure it is well placed to meet the demands of tomorrow.

Lawrence Au: head of Asia-Pacific, BNP Paribas Securities Services

There is no going back on the internationalisation of the Chinese currency, the RMB. Every day, we see increasing financial flows expressed in RMB.  Meanwhile, the emergence of new offshore RMB centres, such as Singapore and London in addition to Hong Kong, are facilitating the operations in this currency, ensuring that they can happen on a 24/7 basis.

For financial institutions, this is the moment to make sure that everything is in place to make the most of the opportunities ahead.

In the near future, holding, trading and transacting in RMB will become common practice. Over the past three years, the internationalisation of the RMB has opened up opportunities to gain exposure to China’s growth, diversify sources of financing and reduce risk.

To diversify investment strategy, asset managers may opt to invest in the onshore Chinese equity and bond markets directly via a QFII licence. Alternatively, they may invest in offshore renminbi-denominated products, such as Dim Sum Bonds and RQFII funds.

Either way, market participants will need to hold RMB in cash accounts. They will need to convert currencies into RMB and back. And they will need to adopt a sound investment solution to manage clearing, settlement and asset servicing in compliance with local rules and practices.

RMB also offers an alternative channel for financing, tapping into the pool of liquid assets available onshore and offshore via the RMB repo market. Active currency and commodities futures markets based on the RMB are developing offshore and QFIIs have been given access to the Shanghai futures market earlier this year.

On 11 June, MSCI announced that China A-shares will be placed under review for a possible inclusion in its emerging market index. Are you RMB ready?

Ivo Distelbrink: head of global transaction services, Asia Pacific, Bank of America Merrill Lynch

The internationalisation of China’s RMB is the most significant global currency event since the launch of the euro. Stoked by unwavering China Government commitment to establish the RMB as a reserve currency, the internationalisation agenda has taken broad strides in a relatively short period.

From where we stand, the RMB’s inevitable rise as the next global reserve currency has substantial implications for financial institutions on every continent. According to the Bank of America Merrill Lynch (BAML) SunGard Asia Pacific Treasury Management Barometer, 16 per cent of corporations in this region are already transacting in offshore RMB. An additional 23 per cent are planning on doing so in the coming 24 months. These are significant statistics that no financial institution can ignore.

Currently, in comparison with other global currencies – the USD (37 per cent), EUR (37 per cent) and Japanese Yen at (3 per cent), the RMB does remain at a nascent stage (0.87 per cent), but is gaining traction. BAML research reinforces this momentum. As of end June 2013, we estimate that 17 per cent of China trades are settled in RMB, versus 12 per cent a year ago.

In our view, numerous drivers will ensure continued RMB adoption globally. Geographic expansion beyond Hong Kong is one initiative. As of May 2013, overall deposits stood at $130 billion (CNY850 billion) primarily in the main offshore hub of Hong Kong, but increasingly in Taiwan and Singapore-based accounts. Outside of these markets, we also believe the establishment of bilateral swap lines with 20 additional economies by the PBOC in late June is indicative of the growing international confidence in the RMB and will spur further usage.

The PBOC’s decision to extend overseas RMB lending for Chinese corporates nationwide is another landmark event in the larger internationalisation program that will encourage increased RMB outflows and create a deeper offshore liquidity pool. We see this as yet another catalyst that will inevitably instill heightened international acceptance and confidence in the RMB.

For financial institutions to support the RMB requirements of corporate clients and remain competitive in this evolving space, several key components must exist to ensure visibility and management over those accounts. Financial institutions require the capabilities to support trade settlement in the RMB currency to their trading counterparts in China. They must possess the ability to hedge RMB risk in the global FX market. They need to be capable of funding their trade settlement payments and hence clearing limits and lines of credit will be important in ensuring a robust RMB clearing mechanism.

However, the pressing question for many financial institutions is how to support these requirements without the RMB clearing infrastructure or a presence in China? One route is clearly partnering with a global banking provider. Financial institutions can leverage the clearing capabilities, local knowledge and resources of a bank efficiently and more importantly, at a cost that does not require major investment. As the RMB story will only become more pronounced, driven by the aforementioned usage patterns and institutional regulations, the time for financial institutions to implement their RMB strategy is now.

Gareth Hockey: foreign exchange and money market sales, Standard Bank

Trade and investment volumes from China to Africa have increased rapidly, reaching $200 billion in 2012. China has surpassed the US as the largest trading partner with the continent. It is likely that bilateral trade volumes will reach $300 billion by 2015 and by then, as much as 30 per cent of all global trade with China will be settled in RMB.

The trade and settlement of RMB is still relatively limited, but financial institutions need to have a RMB strategy to take advantage of the projected growth.

There are various efforts under way to increase the use of RMB. For example, the PBOC’s drive to internationalise the use of RMB is heavily incentivised for Chinese suppliers to invoice in RMB (risk reduction by avoiding currency risk, improved working capital and shortened cash conversion cycle), as well as importers of Chinese goods to settle in RMB have been introduced. Unfortunately, however, many Chinese suppliers do not appear to be fully aware that African traders can even settle in RMB and therefore still invoice mainly in USD.

It is probable that financial institutions will be required to optimally position themselves for what is going to prove to be a compelling business model in the next phase of Sino-African ties. This will ensure that they have the ability to provide competitive FX pricing, payments, structured solutions, trade finance, security and investment services and access to technology, among other things.

A successful strategy requires a deep insight into the objectives of Beijing and an understanding of how they and the Chinese corporates, especially those operating in Africa, are likely to support this endeavour.

The impact of the rise of the RMB and its related benefits remains a critical success factor to short-term growth, which should translate in future growth in using the RMB as a settlement currency.