The emergence of offshore renminbi is not to be underestimated. Billed by one banker as “the most important development in the world’s financial market in the last 40 or 50 years”, the development of an international version of China’s currency is a precursor to the eventual opening of the world’s second-largest economy.
Full liberalisation is set to take several years still, but Beijing’s solution to liberalising its currency has been ingenious; using a quasi-sterilised version, called the CNH, which is primarily distributed, managed and settled in Hong Kong, a province that is quasi-autonomous yet ultimately reliant on the mainland.
So far the experiment has been a resounding success. In the space of three years the CNH has developed in leaps and bounds. Every week more companies gain exposure to the currency, accepting payment for goods and services in it or using it to help fund operations within China itself.
The financial authorities in Beijing are growing more confident too, gradually easing the careful rules and regulations they have set up about the currency and products denominated in it. There’s a long way to go, but it’s an encouraging start.
Many institutions are keen to make themselves known a s market leaders within this exciting area of the financial markets. Banks that enjoy good China ties and boast strength in Hong Kong have particular natural advantages, something made evident from the results of Asiamoney’s inaugural Offshore Renminbi Survey.
Overall we had 458 individual responses from a mixture of financial institutions, corporates and retail clients to a set of questions over the leading service providers across the spectrum of offshore renminbi products.
Their views were clear: HSBC is considered the clear leader for offshore renminbi products, with arch-rival Standard Chartered being second-best placed, and Bank of China viewed as the third strongest overall candidate for CNH services.
Emphasising CNH importance
Winning banks HSBC and Standard Chartered both emphasise their experience and commitment to offshore renminbi when speaking to Asiamoney.
“We have been looking at offshore renminbi every since Hong Kong was allowed to do the offshore settlement business, and we have had core people with experience in the renminbi space for 10 years,” says Justin Chan, deputy head of global markets for Asia Pacific and head of Hong Kong trading at HSBC. “We have also determined that RMB is going to be one of key currencies for banks in Hong Kong, Asia and globally.”
Last year the bank appointed Candy Ho as its head of renminbi business development for Asia Pacific. Ho’s role is to speak with all users of renminbi to understand and sell them the offshore capital products they prefer, be it bonds, FX or derivatives, as well as speaking to global product heads to discuss what products can be placed on offer.
Meanwhile HSBC has formed a steering committee between Hong Kong and China that considers the offshore renminbi in its entirety, be it cash, trade financing or settlement, and from the commercial and retail angles to, in order to build a holistic understanding of the market and how best to offer services to clients.
Standard Chartered also places a lot of importance on its history in Hong Kong and China, with around 5,000 staff based in China compared to only 2,000 in the UK, an indication of the importance it places on the former country.
Globalising the CNH
HSBC has placed a great deal of emphasis on educating its existing clients and prospective clients across the world about the services available in offshore renminbi.
To do so the UK bank has been sending its experts on the road to meet clients. Chan says two of his team are constantly travelling, in Asia, Europe and the US, meeting prospective users of offshore renminbi. “One of my traders and our China deputy head of global markets are travelling in the US right at this moment, meeting companies to discuss this market,” he notes.
“We are talking to banks and conducting one- on-one interviews too; it’s through such dialogue that we can best figure out what products they want,” Chan adds. One example of this is a growing desire for option products in offshore renminbi.
StanChart has been on its own CNH world tour. Tee Choon-Hong, the bank’s managing director of capital markets, says that it has conducted roadshows in Japan, Korea, Taiwan, within mainland China, in Southeast Asia and even in Europe.
“I’m attending a seminar myself tomorrow,” Tee tells Asiamoney in mid-May, “and we’ve got more clients we are talking to in London as well.”
The varied nature of the offshore renminbi market means that bankers need to work together and understand each others’ areas particularly well in order to offer their clients advice on the renminbi.
Tee offers an example of this. “Last year a company needed to get a deal approved and the proceeds remitted into China, and we talked to the PBoC [People's Bank of China] to help them both conduct the transaction and gain approval for the remittance too,” he says. “It’s that sort of guidance that clients most appreciate, particularly given that this is a relatively new area of the financial market.”
Product development
The efforts of these banks to spread the word about the renminbi are a statement of their conviction that the currency’s importance to the world’s financial order is inevitable.
Tee notes that the eurodollar market has taken decades since its launch in the 1960s to gain true traction, whereas the CNH market has moved incredibly fast to gain the level of traction that it has today.
It’s certainly true that the growth of the CNH debt market has been remarkable. CNH debt issuance including certificates of deposit reached Rmb170 billion (US$26.88 billion) in 2011, over four times the Rmb40 billion witnessed in 2010 and a greater volume of debt issuance than experienced in Hong Kong dollars, or Singapore dollars, or Malaysian ringgit, or Thai baht – despite these being far more developed bond markets. Tee predicts that overall debt issuance in CNH this year could reach Rmb200 billion-Rmb250 billion.
Chan believes that one of the next steps will be the development of a loans market in the offshore currency. “We are already seeing the authorities allow more Chinese companies tap the Hong Kong bank system for RMB loans. I’d expect to see a much more vibrant loan market in Hong Kong.”
However a more liquid RMB loan market will depend on it possessing a good benchmark, which in turn depends on more interbank liquidity. Currently all the liquidity resides around the one month sector; greater depth will be needed at a broader array of maturities for a true RMB-Hibor interbank curve to develop.
Tee meanwhile predicts that the coming 12 months could see the development of a more active secondary market for dim sum debt, particularly as the interbank market for CNH between banks deepens.
“We hope to see the development of a repo and reverse repo market to help dealer-brokers fund parties more efficiently, and see the swap market increase in liquidity,” he adds.
Building businesses
For all big participants in the CNH market the true goal is to remain a leading player as China’s renminbi is truly globalised.
That could be fairly soon. As our survey reveals, almost 40% of respondents believe that the renminbi will become fully convertible in less than five years, while 44.61% feel it the currency will become so in less than 10 years.
“Eventually there won’t be CNH and CNY but a convergence between the two into a truly international currency,” Tee says. “And that currency will be one of the most important in the world.”
Chan agrees. “We have always thought that the RMB will be one of the major trading currencies. It’s going to be at least as important as euros and eventually as important as US dollars. It’s definitely a key part of our business and it’s why we want to see more activities involving it in Hong Kong and the rest of the world.”
HSBC and Standard Chartered are the leading lights for offshore renminbi services right now, and they will fight hard to remain so in a market that looks only set to grow.
Their dedication is understandable: the internationalisation of the renminbi looks set to be the world’s most exciting financial market development for many years to come.