BOND TRADERS IN London will soon be as used to typing “CNL” on their terminals as their counterparts in Hong Kong are used to typing “CNH”. The ticker doesn’t formally exist yet but it soon will in the wake of HSBC’s loudly trumpeted Dim Sum bond, the British capital’s second such issue. As no doubt will “CNS” as Singapore has just joined the offshore renminbi feeding frenzy, with the branch of one of the Chinese state-owned banks just about to be cleared to conduct renminbi business in the City state.
Yes folks, the renminbi is going global and everyone wants a slice of the action. Soon all the available tickers will be used up – although no doubt Ted Turner would be happy if the Chinese unit gets to be traded in New York. CNN: it can’t be far off.
If offshore trading in the renminbi takes off, the currency will start to compete with the US dollar as a unit of fundraising, trade settlement and investment. Yet it will still not be fully convertible, nor will China’s capital account be opened up.
So the Chinese are going to have their cake and eat it. While the People’s Bank of China might have recently widened the daily trading band of the renminbi to 100 pips from 50, the rate is still set by them, not by the market. And the PBOC, unlike most other central banks outside the eurozone, will not have the headache of having to set interest rates in relation to capital inflow or outflow as long as the currency remains unconvertible. All terribly neat.
You can understand the fever pitch gripping banking communities in London, Singapore, Taiwan and all the other global financial centres vying for the chance to trade renminbi. Volume in the Chinese unit is a tiddler in terms of overall trade in the mammoth global foreign exchange market, accounting for just 0.4% of daily turnover. In debt markets it’s absolutely piffling, grabbing just 0.1% of daily trading volume. Sure, offshore renminbi deposits outside Hong Kong remain relatively small – London has just US$5.5bn-equivalent – but the trend is for steady expansion and the process of active offshore trading and the selling of renminbi investment products will feed that trend.
DESPITE UK CHANCELLOR George Osborne depicting at the time of the HSBC trade London’s success in getting the renminbi ball rolling as a triumph of international diplomacy, it was nothing of the sort. All a country looking to trade in renminbi – and associated capital markets products denominated in it – needs to do is put in place a swap line with the PBOC and establish clearing lines between its banks and the Chinese central bank.
And why would the Chinese authorities turn any applicants away? The offshore renminbi, while fungible between offshore financial centres, is in most cases disallowed from being remitted back to China, hence having no impact on the country’s money supply or real economy. But if a company wanted to remit funds back to China for FDI purposes, the PBOC would almost certainly say “yes”. It’s about as virtuous a circle as any country has ever enjoyed in the history of the global financial system.
STILL, THERE’S ANOTHER aspect to these foreign exchange flows and it centres on China’s high-net-worth individuals. In a recent survey conducted by China Merchants Bank and Bain, 60% of the country’s rich stated they were either contemplating emigration through overseas investment programmes or actively embarking on leaving China. Meanwhile the survey also revealed that 27% of those with more than Rmb100m (US$16m) of assets have already left the country.
While China is paranoid about fund flows out of the country, anecdotal evidence suggests that its rich have been rather adept at getting renminbi out and into offshore bank accounts, principally in Hong Kong, often dressing up the transfers as trade finance, which is fully liberalised by the PBOC. Going forward, they will have the choice of London, Singapore and Taipei as well, not to mention other financial centres looking to trade the currency.
Of course, China has been a veritable money printing machine for its entrepreneurial classes over the past 15 years or so and a large number of China’s new super rich are petrified of having their recently earned wealth expropriated by the state.
There are unpleasant precedents to suggest that this fear is not unfounded. One would be the case of Wu Ying, a self-made billionaire and once China’s sixth richest woman who was convicted in 2009 of financial fraud and sentenced to death. That sentence was last week commuted, but whether she was guilty of fraud or not – she claimed to have borrowed money from friends and reinvested the funds profitably, rather than embezzling them – the relationship between the country’s ultra-rich and its political leaders is an unpredictable one.
As long as it remains so, and as long as China’s wealthy decide they would like to ditch the pollution of Shanghai or Shenzhen for the clear skies of Singapore and London, you can bet the offshore renminbi game will become one of the biggest in town.