The RMB’s dizzying ascent has shaken world banking but it has far to go to achieve dominance
Considering that before 2009, the renminbi (RMB) had little to no international exposure and that Beijing prohibited all exports of the currency as well as any use of it in international transactions, it becomes apparent that the currency’s internationalisation has been nothing short of meteoric.
In the space of four years, a wide variety of RMB products and services have sprung up across the entire financial services spectrum – from retail and commercial, to investment banking, asset management and insurance.
As a trade-settlement currency, what began at a near negligible level in 2009 now stands at the equivalent of US$422 billion for 2012 – about 12 per cent of China’s overall trade, according to HSBC. The bank expects this to rise to 30 per cent by 2015, making it the world’s third-largest settlement currency after the euro and the US dollar.
It goes without saying that such rapid changes have profoundly affected the wholesale banking sector in Hong Kong and around the world. Since RMB trade settlement was first introduced in 2009, many financial institutions have sought to build up their trade-settlement and payments-clearing capabilities.
Another area on which the RMB has had a direct impact is foreign exchange, where it is used to facilitate trade payments, in FX trading, and as a currency for trade finance, according to a report by financial messaging firm SWIFT.
Tan Shiming, global product manager at Citi, says that the global uptake in RMB usage has been swift and that the range of RMB products available to corporates has also surged. Nowadays, it includes everything from FX cash, FX derivatives, treasury, related equities and asset management to trade financing and custodian services, all of which did not exist prior to 2009.
He says another good example is that RMB Hibor (Hong Kong inter-bank offered rate) products weren’t possible until a scant few months ago. But they have been made possible by the launch of the offshore RMB Hibor rate in June, paving the way for – among other things – hedging products such as RMB interest-rate and currency swaps.
As an investment currency, the launch of the Qualified Foreign Institutional Investors (QFII) scheme near the end of 2002, let licensed foreign investors trade RMB-denominated A-shares in Shanghai and Shenzhen within a permitted quota for the first time.
This has been expanded with added quotas and licence-holders. A sister scheme, RQFII, was launched in 2011, allowing licensed financial institutions to participate in the stock market using RMB rather than US dollars. These have allowed for the creation of a new of breed of investment funds providing direct exposure to China.
In fixed income, so-called “dim sum” bonds – RMB-denominated bonds issued outside China – were pioneered in Hong Kong as early as 2007, but their effect on investment banking did not pick up until 2010, after restrictions were relaxed, letting non-financial firms and organisations outside the mainland and Hong Kong issue them.
Finally, a retail banking business has emerged, primarily since 2004 in Hong Kong and Macau, where banks are allowed to accept RMB deposits and provide forex, remittances, and credit and debit card services in the currency.
Nathan Chow, economist of group research at DBS Bank (Hong Kong), says while wholesale and commercial banking has been able to exploit RMB reforms to create income-generating products, benefits are less pronounced for investment banking due to the relative lack of RMB-denominated equities. There are still few RMB-denominated equities listed in Hong Kong.
And while for overseas banks, RMB liberalisation has led to the proliferation of new products, a different dynamic is at play in onshore mainland banks. Over the past three decades, the greatest driver of banking profitability has been the three-per-cent guaranteed spread between domestic deposit and loan rates. A flexible exchange rate will bring about pressures to liberalise interest rates, shrinking profit. Onshore banks are thus turning to providing RMB services to wholesale and small and medium clients to generate additional revenue, Chow says.
Broadly speaking, he says that while varying between individual institutions according to exposure, RMB activities are already generating significant profits. As an example, Chow notes that at DBS Bank Hong Kong, RMB business grew to account for over 20 per cent of the bank’s earnings in the first half of 2013. It expects this figure to hit 25 per cent by end-2013. It’s a given that sector-wide revenues from RMB will go up as reforms continues apace, he says.
While there is little doubt other offshore centres such as Taiwan, London and Singapore are set to grow in importance, their relationship complements rather than competes with Hong Kong.
“We are targeting different markets. In Hong Kong, we are basically focusing on Asia, whereas London will service the European markets. Singapore’s growth will depend on RMB use in Asean,” Chow says.
Looking ahead, Citi’s Tan says: “For the past three years, regulatory reform has focused on current account item, on mainly trade-related transactions. In the next two or three years , I would say that the focus will be shifting towards capital account items, such as cross-border lending, RMB direct investment, QDII and RQFII,” he says.
How fast it proceeds really depends on the moving parts, including financial reforms, interest rate and FX rate liberalisation, as well as capital account convertibility, he says, adding that these moving parts must move in lock-step for RMB liberalisation to continue.
There’s also a lot of debate about the pace of regulatory reform and where the currency is headed.
Jimmy Leung, PricewaterhouseCooper’s banking and capital markets leader for China, says: “It is unlikely that the RMB will be fully converted as the market wishes in the foreseeable future. China is encouraging businesses in other countries to settle in RMB, and to allow the currency to flow from and to China on a managed basis. [It] may have the ambition of making RMB a commonly accepted reserve currency, or even replacing the US dollar. However, there is a long way to go before that becomes a reality.”
Despite the proliferation of RMB-related opportunities, recruiters say it is difficult to gauge its impact on hiring. Most say RMB internationalisation has led to a rise in banking activity, but this has not translated to roles as RMB servicing is integrated within the business.
Pallavi Anand, director at recruitment firm Robert Half Hong Kong, says the biggest effect so far has been in interviews. “There are employers who might ask if candidates have knowledge or skill sets in regulatory reporting. The Hong Kong Monetary Authority requires banks to file a specific return if they have RMB activities. We do not see many jobs created solely for RMB business,” she says.