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Navigate the RMB


Renmibi in motion: Shifting into high gear

ON THE BACK OF CHINA’S EMERGENCE AS A GLOBAL ECONOMIC POWERHOUSE, THE TRAJECTORY OF ITS CURRENCY IN TERMS OF IMPORTANCE AND INTERNATIONAL USE HAS BEEN ASTOUNDING. THE PAST 12 MONTHS HAS SEEN POSSIBLY THE MOST RAPID RELEASE OF REFORM MEASURES TO DATE DURING THE RMB’S INTERNATIONALISATION JOURNEY, ALTHOUGH IT HAS ALSO SEEN SOME OF THE HIGHEST LEVELS OF VOLATILITY.

This reform progress culminated in November 2015 when the International Monetary Fund recognised the RMB’s global importance by including it in their Special Drawing Rights basket from 1 October 2016. The announcement places the RMB among the top few currencies of the world and is an important step along the way to it becoming a more important reserve currency.

China is the world’s second largest economy in nominal GDP terms and is also the world’s largest trading nation. Despite a very underdeveloped capital markets system, it also boasts equity and bond markets that rival and exceed in size those of many more developed nations.

China has a USD 8.5tn bond market and a USD 6tn equity market, both of which provide only a relatively small percentage of overall corporate financing when compared to global peers. As China’s capital markets begin to play a more important role in allocating capital, the transition from loan financing to bonds and equity is likely to see China’s capital markets become the largest in the world. The current small foreign ownership and small foreign issuance in these markets today also looks set to grow exponentially. China may therefore represent one of the most significant global investment opportunities over the medium term.

The barriers continue to be brought down on foreign direct investment as well. The gradually reducing size of prohibited and restricted industries on China’s “negative list”, coupled with expansion of the various free trade zones is presenting unprecedented access opportunities for businesses looking to establish themselves onshore in China.

Making the most of these opportunities requires the right banking partner. ANZ has the network, local knowledge and expertise to help our customers gain a competitive edge.

Locally based in 29 Asia Pacific Markets, we act in close collaboration with our customers and provide comprehensive RMB services via our locally incorporated and growing presence in Mainland China as well as in all major RMB clearing centres including Hong Kong, London, Singapore, Taiwan and Sydney.

We trust you will find this report an insightful and helpful read as you navigate the rich opportunities presented by China’s fascinating and changing landscape.

Shayne Elliott
Chief Executive Officer ANZ

KEY TAKEAWAYS

China’s Renminbi is already well utilised in areas like cross-border trade but in other areas, for example foreign ownership of Chinese bonds and the RMB’s share of central bank reserves, international participation has yet to be fully embraced. A raft or recent liberalisation efforts aimed at increasing the attractiveness of the RMB will, over the next few years, see China’s currency increasingly challenge the larger incumbents (USD, EUR, GBP and JPY) for a more balanced and representative slice of the global pie.

  • Foreign exchange reform has been in the spotlight with the PBoC’s daily RMB fixing framework changing to be a more market-determined process. This has driven a depreciation bias in the currency and led to bouts of volatility that has required PBoC intervention to maintain a level of currency stability. 
  • Access to China’s onshore foreign exchange market has been made easier for central banks, sovereign wealth funds and other eligible institutions.
  • Liberalisation of onshore bond market access to global investors is a “game-changer” which we believe will represent one of the largest global investment opportunities in the coming few years, particularly in an era of ultra-low sovereign yields.
  • Capital market reform also materialised with the “Panda bond” market reopening for foreigners to issue their bonds onshore in China. This change, coupled with greater access for foreign investors, will see China’s bond market rival that of the United States over the next decade.
  • Liberalisation efforts have been rewarded, with the IMF including the RMB into its SDR basket from 1 October 2016. The RMB currently represents around 1% of global foreign exchange reserves and ANZ Research has estimated that if this grew to 4% (well below the RMB’s SDR weighting of over 10%), this could see USD 230bn move into RMB assets.
  • With currency volatility, rising US interest rates and a weaker RMB Chinese corporates have begun to shy away from their traditional preference of USD denominated debt. This move will have positive benefits not only in the form of better foreign exchange risk management in China, but also in the form of growing RMB trade, financing and investing with China’s global business partners.
  • Global treasuries have also benefited with new liquidity management measures allowing greater flexibility to move RMB onshore through cash pooling structures. Capital flight, however, has put a dampener on the PBoC’s current appetite for cash pooling outflows from China, although this should be temporary.
  • Policies such as China’s “One Belt One Road” along with the formation of the Asian Infrastructure Investment Bank and the Silk Road Fund provide new mechanisms for broadening the use of RMB in trade and financial transactions in the Asian region and beyond.
  • We expect China more broadly will embrace foreign direct investment through a reducing “negative list” of industries, while generally favouring a registration process over regulatory approval where possible.


THE RMB INTERNATIONALISATION JOURNEY

The internationalisation of the Renminbi (RMB) is vital to China’s long-term success in global financial markets and over the past decade the Chinese authorities have been carefully working to balance the key objectives of a free-floating currency, liberalised capital account and an independent monetary policy.

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NAVIGATING CHINA’S FOREIGN INVESTMENT LANDSCAPE

Operating a business in China or investing in China presents significant opportunities. Ongoing reform is seeing China gradually move to a registration and filing based system for foreign direct investment with less focus on government approval for certain sectors. In addition, capital market liberalisation is presenting new investment opportunities across fixed income, credit, equities and foreign exchange.

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THE NEW CURRENCY OF TRADE

RMB internationalisation is an integral part of China’s financial reforms, with gradual liberalisation of the current account since 2009 and growing use of RMB in China’s cross-border trade. This ongoing growth presents a number of benefits when using the RMB as an invoicing and settlement currency.

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FINANCING SOLUTIONS

The growing use of RMB worldwide is creating new trade, investment and financing opportunities for companies doing business with or in China. As a result of these RMB flows, companies have an increasing need both onshore and offshore to raise RMB funding to finance their working capital requirements, capital expenditure and new project developments. To satisfy these needs, as well as those of the global investor community, China’s onshore financing market will gradually transition from being a “loans based” market to a more “bonds based” market.

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MANAGING RISKS & EXPOSURES

RMB denominated transactions can lead to unwanted foreign currency and interest rate exposures that need to be managed, particularly in an environment where market forces are playing an increasing role in setting prices. With this in mind, it’s important to understand the key differences between the onshore (CNY) and offshore (CNH) markets for foreign exchange and interest rates, as well as the various tools at your disposal to effectively manage risk.

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CROSS-BORDER LIQUIDITY MANAGEMENT

In order to support the expansion of cross-border RMB transactions and further internationalise the currency, the PBoC has issued a number of policies to relax controls on cross-border RMB cash pooling and other treasury management activities. At the same time, new cross-border RMB payment infrastructure is positioning the RMB for greater global use in the future.

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Contact your Relationship Manager for the full report.

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