China opens up A-shares market as RMB gains traction

The RMB is the external currency of China

A landmark deal between China’s Hong Kong and Shanghai stock exchanges is set to open up unrestricted access to the China A-shares market to foreign investors for the first time, starting this month. The deal also reflects the rising internationalisation of the Chinese renminbi currency worldwide.

Under the deal, non-resident investors will be able to invest in Chinese companies whose shares are listed on the SSE and denominated in renminbi only, so-called “China A-shares”, without having to apply for a status as a Qualified Foreign Institutional Investor or Renminbi Qualified Foreign Institutional Investor.

Previously, access was severely restricted and few new licences were granted. Businesses typically had to be based in China, or else face draconian limits on their participation. The deal is part of the Chinese government’s plans to open up the Chinese market, moving in gradual, cautious steps. It also resurrects the Stock Connect project between the two exchanges, which had been unexpectedly placed on hold last month when the required regulatory approval failed to materialise.

The deal is also significant for the internationalisation of the Chinese renminbi currency, since China A-shares are denominated in the currency. When the new rules go live on 17 November, foreign firms such as Clearstream, which has a Hong Kong link via Citibank, will be able to offer settlement and custody services for China A-shares for the first time. The company already provides renminbi-denominated issuance, custody and settlement services.

“The Shanghai-Hong Kong Stock Connect program responds to the financial markets’ strong interest in the Chinese currency,” said Anne-Pascale Malréchauffé, head of network management at Clearstream. “With this program we are now able to provide our customers with investment opportunities in China A-shares, a highly sought-after asset class. We have been supporting the internationalisation of the renminbi since the early days and welcome this program as a further step towards a further development of an international renminbi market and the Chinese capital markets in general.”

The market for Renminbi has become increasingly competitive in recent months, as several cities vied for position as the top offshore renminbi centre. In November 2013, Industrial and Commercial Bank of China launched a $329 million renminbi-denominated bond in London, marking the first time a Chinese bank had done so and a significant boost for London’s ambitions in the currency. In September, BNY Mellon estimated that London and Singapore would become the dominant offshore hubs for the currency alongside Hong Kong by 2020.

“The impact the continued internationalisation of the RMB will have on the global monetary landscape cannot be overstated,” said Fred DiCocco, Asia-Pacific head of sales & relationship management for BNY Mellon’s Treasury Services business. “To give this some context, around 20% of China’s $4 trillion in annual foreign trade is conducted in RMB today, a figure which could surge to over 30% as early as next year and see the RMB become one of the top three global trade currencies. It would not be naïve to suggest that it could rise to as much 50% by 2017.”