26 June 2017

Global march of the yuan will continue

Helen Wong says though the pace of internationalisation has slowed, China’s continuing financial reforms and the belt and road initiative will help the renminbi regain momentum.

Renminbi internationalisation seemed to have slowed in the past year, but behind the scenes China continues to enhance its financial infrastructure so as to increase global usage of the renminbi.

The cross-border use of the Chinese currency decreased significantly in 2016. According to SWIFT, a network that banks around the world use to send and receive money, the value of international renminbi payments fell by nearly 30 per cent, and the renminbi is now the seventh-most active payments currency (it began 2016 in fifth place).

Offshore renminbi deposits tell a similar story. The stock of renminbi deposits outside mainland China has been shrinking since the beginning of 2015. Renminbi deposits in Hong Kong, the world’s largest offshore renminbi hub, totalled 528 billion yuan (HK $603 billion) at the end of April, nearly 50 per cent less than the peak of over 1 trillion yuan that were parked in Hong Kong at the end of 2014.

The decline in the using and holding of renminbi was not unrelated to concerns over China’s economic slowdown, the renminbi’s depreciation, and the tightening of cross-border capital flow regulations. Yet, against this backdrop, China ploughed ahead with renminbi internationalisation, widening the range of domestic assets that foreign investors can buy and sell.

First, there is China’s stock market. Announced last August and launched within four months, the Shenzhen-Hong Kong Stock Connect allows international investors to trade the shares of smaller, more entrepreneurial companies, whose growth is a critical component of China’s economic reform. Via Hong Kong, investors around the world now have direct access to most of the listed companies that are traded on the mainland – an opportunity that was unavailable only three years ago.

Then, there is China’s bond market. Last month, China announced the establishment of Bond Connect, a trading link that will connect China’s bond market with the world. The formal launch of this latest breakthrough in the development of China’s bond market looks certain to be the next milestone in the opening up of China’s capital markets.

China’s rapidly expanding bond market is the world’s third-largest, but foreign participation has been limited: international investors own less than 2 per cent of China’s government bond market, compared to 10 per cent in Japan, over 25 per cent in the UK, and nearly 50 per cent in the US. The gradual opening up of China’s bond market will offer abundant opportunities to issuers, investors, and all the intermediaries in between.

The three “Connect” schemes – Bond Connect, Shenzhen Connect, and the Shanghai Connect that was launched in 2014 – not only made the inclusion of mainland Chinese bonds and stocks in global indices a reality, but they also serve as testimony that renminbi internationalisation is a medium-to-long-term strategy, a view that was most recently reiterated by the People’s Bank of China in March. Despite the decrease in the cross-border use of the renminbi in 2016, the fact remains that China is committed to implementing foreign-exchange and financial reforms.

Another catalyst comes in the form of the Belt and Road Initiative. An underlying force behind renminbi internationalisation has been China’s growing trade. Considering that China’s trade with belt and road countries outperformed its overall trade in 2016, the initiative will boost trade along the belt and road as well as the use of the renminbi as a trade currency.

More importantly, the belt and road will increase the use of renminbi for financing. Chinese companies are participating in belt and road projects. These companies, with their renminbi-denominated balance sheets, will increase the pools of renminbi liquidity in the host countries. Furthermore, the belt-and-road related infrastructure projects will increase demand for renminbi hedging.

Renminbi internationalisation may have slowed in the past year, but China has continued to open up its capital markets. Furthermore, over time, the Belt and Road Initiative will increase the use of the renminbi both as a trade and financing currency.

Global march of the yuan will continue (3-page PDF 136KB)