CHINA’S CURRENCY ENGINEERS
The People’s Bank of China (PBOC) and the Chinese central government in Beijing have been in pursuit of RMB internationalization for over 10 years, and despite some minor course changes, important milestones continue to be achieved.
In the past year, we have seen the induction of China’s equity markets into the MSCI Emerging Markets Index, new settlement systems for the RMB, and an increased focus from Beijing on utilizing the country’s own currency to support over half a trillion RMB of future loans for BRI. Importantly, as of June 2017 China expanded its bilateral currency swap agreements to 36 countries, of which 24 are countries within the BRI, according to Moody’s.3
WHAT’S IN STORE FOR 2018?
For 2018, the engineers of global RMB growth in Beijing have signalled that the next series of major investment and trade channels will soon be established. While the details are still being determined, Bond-Connect will for the first time lead China’s massive USD 9.4 trillion debt market to be fully opened to international investors. With only 2% of Chinese debt currently being held by overseas buyers, Bond Connect will establish critical new global linkages for the RMB to be used by international investors.4 In turn, global asset allocations for the China market will steadily increase, and create signifcant debt opportunities for Chinese corporates and investors alike.
Another major initiative that, if successful, would further reinforce global RMB flows is Beijing’s support to create new oil benchmarks for the “petroyuan”, which could eventually allow the world’s largest energy consumer to use its own currency when securing long-term supply contracts. China’s state banks will likely be the initial leaders behind the petroyuan in order to ensure sufficient liquidity exists in the underlying market. That said, China has already opened more than 6,000 trading accounts this year for long-awaited crude futures contracts – with three-quarters coming from individual traders, demonstrating the domestic retail interest alone in this new market.5 Over time, we could expect to see RMB ows begin to proliferate from oil-producing regions into other new markets, as well as additional commodities transacting in China’s currency.
THE SINGAPORE CONNECTION
While no single development will likely mark the moment when the RMB has become fully internationalized, an inflection point has arguably already been crossed for the currency throughout Asia. In the right setting, banks and businesses outside China are now able to work on a daily basis with their Chinese commercial partners to build “local-to-local” networks that allow the RMB to be utilized across country, regional and global markets.
Singapore has long remained the financial core of South East Asia (ASEAN), and since the era of globalization began, the city has renewed its role as the cultural, transportation and economic gateway into the region. In 2015, investments from Singapore into Malaysia and Indonesia alone were over USD 60 billion.6 In the process, Singapore and the financial institutions based there have developed deep connections with neighboring economies that allow for the growth of commodity trade and investment flows to proceed smoothly.