An economic power on a global level, China, which last year recorded a 7,7% GDP growth (for a total amount of RMB 56,9tn - equal to USD 9,4tn), has increasingly actively promoted, in over the last few years, the gradual adoption of its national currency, the renminbi or yuan, as a means of payment in international transactions.
The wide spread of the Renminbi (CNY or RMB) between financial institutions and companies that do business with China, has allowed its use to consolidate as “business as usual".
Based on data collected by SWIFT, the renminbi entered, at the end of last year, in the top ten of the currencies most used in international trade, ranking last month in seventh place, with a 1,39% usage share worldwide; instead it overtook the euro, in October 2013, establishing itself as second currency most used in trade finance transactions.
Since 2009, when the pilot project for the use of the renminbi in international trade was launched, the country's government authorities have taken more and more measures to promote the diffusion of the national currency in global markets.
Officially established in Hong Kong in June 2010, the offshore renminbi market (unofficially known as CNH), has also accompanied the adoption of these measures, significantly contributing to the process of internationalization of the Chinese currency. Within this market, the renminbi is fully convertible and can circulate freely without restrictions; its exchange rate with other international currencies is determined by supply and demand mechanisms, which is why two distinct exchange rates have arisen for the same currency, Onshore (CNY) and offshore (CNH).
The use of Hong Kong as a testing platform has in fact allowed China to experiment, in a non-invasive way, numerous financial and monetary reforms aimed at supporting the role of the renminbi in global markets.
Il process of “renminbization" provides for the development and the consolidation of the Chinese currency globally as the main currency for international trade, investment vehicle and, in the future, adoption of the renminbi as an international reserve currency.
Gradually, the Chinese government relaxed controls and restrictions on the country's money market, allowing international companies to benefit from the new opportunities that were developing in the Mainland (which defines China's onshore territory, excluding Hong Kong and Macau) and in its offshore market.
Despite the achievements, however, the Chinese currency still has some limitations. It's about a not fully convertible currency, characterized by restrizioni which nevertheless persist regarding capital flows into the Mainland: capital injections and reductions, investments, capital payments, equity loans and other types of capital transactions (with the exception of intra-group loans also made across the borders of the Mainland) are in fact subject to approval, through a case study by chance, by the competent authorities.
Many of these capital restrictions have been partially liberalised, on the basis of quota caps and within well-defined plans. This is the case of the projects for the supervision of foreign direct investment from and to the Mainland (RMB ODI and RMB FDI), and the scheme of maximum investment quotas in the Chinese stock market foreseen for RMB Qualified Foreign Institutional Investors (RQFII).
These limitations are destined to disappear with the affirmation of the Chinese currency globally, and the commitment of the Chinese authorities leaves no doubts about it: the promotion of pilot project in Qianhai Bay and the recent creation of a free trade zone in Shanghai, in fact appear only the first of a series of measures that will be extended to the whole country.
Renminbi in international payments, business as usual
To pave the way for the internationalization of the Chinese currency was the Pilot project for the regulation of cross-border exchanges in renminbi, launched in July 2009 to promote the use of Chinese currency in international trade with trading partners. This programme, which initially involved only a few Chinese cities and provinces as well as a small number of trading partners (Hong Kong, Macao and the ASEAN countries), was subsequently expanded twice, in June 2010 and August 2011, to include all provinces of the Mainland, as well as all of the country's international trading partners. In March 2012 there was a further turning point within the project, thanks to the introduction of a reform that extended the participation in the project of all exporting and importing companies, previously bound to requests for approval.
Since the introduction of this project in 2009, the renminbi has begun its climb within the ranking of the currencies most used in international trade: From the 35th place in October 2010, the Chinese currency has managed to rank at the 7th place in February of this year.
While the majority of renminbi-denominated transactions are made in Hong Kong, which accounts for more than 70% of business volume, the adoption of the Chinese currency in international payments is also observing significant growth in other markets, especially in Europe. Indeed, in the last year, the use of the renminbi as a payment currency in commercial transactions with China grew by 163% in Europe, a higher growth rate than that observed in Asia in the same period, which instead recorded a growth in the use of the renminbi of 109% (excluding China and Hong Kong).
Among these, contributing alone for 85% of payments in RMB by value, the main user countries stand out: United Kingdom, Singapore, Taiwan, United States, France, Australia, Luxembourg and Germany.
Preceded by the US dollar, the Renminbi he has also established himself globally as second currency used in international trade finance (moving from a share of 1,89% in January 2012 to a share of 8,66% in October 2013), overtaking the euro (6,64%) as a reference currency for investment instruments trade finance such as letters of credit and receipts.
The increasingly rapid affirmation of the RMB in international payments is also supported by the Chinese central bank, the People's Bank of China (PBoC), which has opened a large number of swap lines with several central banks of some of its trading partners. Worthy of note is certainly the establishment of a currency swap line with the European Central Bank, signed in October last year for a value of RBM 350bn/EUR 45bn: this is the largest swap line signed by the PBoC in Europe and the third by extension between the swap lines that China has signed internationally up to now (after Hong Kong and South Korea).
In view of the limited availability of renminbi in the offshore market, these lines respond to the need to provide international operators with a measure of security and supply of Chinese currency liquidity of last resort. The use of these lines is in fact activated when it is not possible to refuel on the offshore yuan market through recourse: alle clearing banks for the regulation of trade denominated in yuan (there are currently three clearing banks: BOC Hong Kong, BOC Taiwan; and ICBC Singapore – the possible appointment of another clearing bank in London is however under discussion); to the corresponding banks Onshore in the Mainland; or by accessing the offshore RMB market through companies and retail investors who can buy and sell Chinese currency in the offshore market.
The growing adoption of the renminbi in international trade has consequently led to the development of a number of investment instruments denominated in offshore Chinese currency, such as currency deposits in CNH and instruments for managing exchange rate and interest rate risk (including forwards, options, futures, swaps and IRS). Among the various investment tools that have developed, i dimsum bonds (bonds denominated in offshore renminbi) are certainly the most successful.
The establishment of the offshore RMB market played a decisive role in this case: the issues of bonds denominated in Chinese currency had in fact been limited before then, to then develop significantly in the years immediately after the establishment of the RMB market CNH extension.
I dimsum bonds have established themselves as particularly attractive investment vehicles on an international level. Despite the volatility that characterizes the markets, these instruments are nonetheless favored by international operators as they have characteristics that preserve their profitability: short duration, generally less than three years; low sensitivity to the volatility of the main international markets and to fluctuations in the interest rates of the major global economic powers; small size, usually between RMB 500 million and RMB 2 billion; good returns, generally around 4%-5%.
Also in terms of credit quality, i dim sum bond they are a good investment option. In fact, the issuers of these CNH-denominated securities are not limited only to the government authorities of the country and to Mainland companies, often unlisted and which do not have an international rating, but also include a large number of financial institutions and established international companies with low risk (blue-chip companies).
As for the role of international reserve currency, held by governments and international financial institutions, the renminbi still has a long way to go. Nonetheless, some countries have already begun to include the Chinese currency, albeit in insignificant percentages, within their foreign exchange reserves. These include Australia, which at the end of April 2013 invested about 5% of its foreign currency bank reserves in Chinese government bonds, and Nigeria, which holds 10% of its foreign exchange reserves in renminbi. Thailand, Malaysia, Japan, Venezuela, Russia and Saudi Arabia also hold reserves denominated in Chinese currency in the form of cash e bonds.
The pilot projects of Qianhai and Shanghai free trade zones
Among the most interesting projects launched by the Chinese government in recent years, the Qianhai Shenzhen-Hong Kong Modern Service Industries Cooperation Zone, announced in July 2012 on the occasion of the 15th anniversary of Hong Kong's return to China, and the more recent plans to establish a Free Trade Zone in Shanghai, announced in September last year.
These are projects of particular importance by virtue of the implications they entail for the future of the deregulation of the current restrictions inherent in the free use of the renminbi in capital account, as well as for the process of internationalization of the renminbi.
The area of Qianhai Bay and the FTZ of Shanghai, both of small dimensions (respectively just over 15 km2 and 17 km2) have in fact been designated by the Chinese authorities as platforms for experimenting with the reforms necessary to promote the full convertibility of the renminbi into capital account. Given the limited territorial extension and the nature of the financial experiments that will be conducted in these two areas, which will initially mainly concern areas where the level of convertibility is low, a weak impact on the country's economy is expected.
Even with regard to investment opportunities, foreign operators will still be bound by the negative list in force in the country, which provides for the exclusion or restriction of foreign investment in 18 sectors, such as the media industry, the internet, villa construction, golf courses and theme parks. Of particular interest within these areas is the project of “cross border lending” with Hong Kong financial institutions: clearly, it will be Hong Kong banks, rather than those in Qianhai and Shanghai, that will lend to companies located within these pilot zones, as interest rates on loans on the onshore renminbi market are significantly higher than those applied by banking institutions in the CNH market.
These projects show the government's commitment to promoting the liberalization of the national currency; the objective is also to encourage economic development in the country aimed more at developing the service sector and promoting consumption, by moderating the dependence of the country's economy on exports and investments.
On the basis of the goals that will be achieved in these areas, the reforms adopted will finally be gradually extended to the rest of the country, promoting the free circulation of the Chinese currency: in order to guarantee the affirmation of the renminbi globally as a reference currency in payments international markets, as an investment instrument and, finally, as an international reserve currency, the full convertibility of the renminbi is in fact fundamental.
