Offshore renminbi products take off

Hong Kong’s new renminbi inter-bank market launched as limits on offshore renminbi circulation are being loosened.

Geographical boundaries for the clearing of cross-border renminbi trade settlement transactions were significantly widened on 13 June 2010. This came shortly after the People’s Bank of China (PBoC) and Hong Kong Monetary Authorities (HKMA) extended a scheme allowing companies to settle trade contracts in renminbi with their counterparts in China from just those in Hong Kong, Macau and ASEAN to companies in all countries, and domestically from five cities originally (Shanghai, Guangzhou, Shenzhen, Dongguan, and Zhuhai) to 20 provinces.

In the first year of the original scheme total volume of renminbi trade transactions jumped to more than RMB10bn in March 2010 from less than RMB2bn in 2H09. The success of the scheme has clearly spurred China’s timetable for speeding up internationalisation of its currency, according to an HSBC Global Research report.

On 19 July, the PBoC and Bank of China (Hong Kong) Limited (BOCHK), the Renminbi Clearing Bank, inked an agreement lifting the last restrictions on Hong Kong’s renminbi inter-bank market. This gave the green light to non-bank financial institutions to open renminbi accounts without limits, enabling corporate, institutional and individual retail investors to transfer funds between renminbi accounts held in different Hong Kong banks, for any purpose.

But note: Beijing hasn’t thrown away all control – clearing with mainland banks must still pass through BOCHK, and can only take place for settlement of trade specific transactions. By allowing banks to circulate renminbi amongst themselves on behalf of both retail and corporate clients, a new platform has been created for renminbi financial product development. Not only does this consolidate Hong Kong’s role as a renminbi offshore centre, but more importantly, it also opens up new ways in which foreign investors can hold – and thus invest in – the renminbi offshore.

New Hong Kong renminbi rules: the low-down

1. All restrictions and caps lifted on the transfer of renminbi funds between different renminbi accounts held within the same, or by different, authorized financial institution(s).

2. Conversion limits unchanged for personal and designated business customers at RMB20,000 (HK$22,893)/day for renminbi deposit accounts for personal customers; up to RMB20,000 per transaction per person in banknotes for walk-in personal customers and one-way conversion from renminbi to other currencies for designated business customers.

3. Renminbi-denominated investment products, except for renminbi loans to personal customers and designated business customers, can now be offered by all financial institutions.

4. Restrictions on opening of renminbi corporate accounts by non-bank financial institutions scrapped.

5. Key limitation: authorized institutions’ ability to cater to demand will be capped by their capacity to square their position in Hong Kong’s renminbi inter-bank market.

BOCHK retains key control of renminbi supply flowing into the inter-bank market. Renminbi supply (on a smaller scale) can also be deposited in the inter-bank system via renminbi trade settlement transactions and conversions made by personal and designated business customers within the RMB20,000/day limit. Revving up the engine Looking ahead, the frequency and size of Beijing’s steps towards renminbi internationalization look set to increase. China is currently the world’s largest exporter and second-largest trader, seeing USD2.8trn worth of goods (80%) and services (20%) traded across its borders last year.

The biggest potential for renminbi settlement lies in China’s trade with non-G3 economies, most of which is settled in a third party currency – USD – rather than their own currencies. Based on our forecast that half of China’s total foreign trade with those countries will be settled in renminbi within three to five years, even if we assume a modest average annual rate of growth of 15% to 20% for trade (from 2003 to 2007, China’s annual trade growth rate averaged almost 30%), that would translate into annual renminbi-denominated trade flows of nearly USD2trn (HK$2.29 trillion) per annum. This will make the renminbi one of the top three widely used currencies in the global trade.