The development of the renminbi (RMB) into an almost freely convertible currency that enjoys widespread international use represents an important step in China’s economic development. China’s rising levels of trade and investment around the world requires careful planning to develop and modify platforms, policies and products required to facilitate commerce and comply with regulations around the world.</p> Large multinational corporations need to learn about and keep abreast of the latest developments and procedures to handle the conversion and remittance of RMB. The currency’s internationalisation will affect their treasury management and payment practices. Treasury managers need to know how to utilise the latest banking services, which are evolving to deal with this unique situation.</p> Despite its growing international use, the RMB’s liberalisation outside of China is only a recent event. It started in Hong Kong in 2003 by allowing retail depositors to exchange RMB and by 2009 China issued its first offshore RMB-denominated bond. In 2010, the People’s Bank of China (PBOC) and Hong Kong Monetary Authority permitted Hong Kong banks and their customers to invoice and settle trade in RMB.</p> The offshore renminbi markets have steadily expanded over the last three years in trade, deposits, bond issuance and FX trading. “All of these steps are important and occur in a bilateral manner, but in no specific order,” observes Alex Medana, director, securities markets for Asia at SWIFT. “The practical focus is not full convertibility, but in improving the usability of the renminbi. About 1,500 institutions are dealing in the currency and the participants are growing.” Indeed the expanding availability of offshore renminbi has “increased its utility to a point where it is actively traded among counterparties outside of China.”</p> Fundamental demand</h4> China’s expanding economy has fuelled fundamental, long-term demand for many commodities such as oil, which is driving the renminbi’s use and recognition. According to Oliver Brinkmann, head of capital markets and treasury solutions for Greater China at Deutsche Bank, “The RMB is steadily moving towards being a leading global currency. Today, it is the world’s eighth largest trading currency and the second largest trade finance currency. Large trade deals like the recent Gazprom natural gas agreement with Russia underscore the single sizeable trades that underpin the other activities. We see strong momentum for RMB international trade settlement as it has moved from 22nd place to second place in a matter of three years.”</p> An extensive international banking infrastructure has been established to manage the RMB’s expanding flows. Brinkmann points out, “Clearing infrastructure continues to improve and broaden as the PBOC has signed memoranda of understanding with London, Frankfurt and other locations to become RMB clearing centres. This is an example of the widening acceptance of the RMB.”</p> The recent establishment of the Shanghai Free Trade Zone is an important development towards liberalising currency movements onshore in Brinkmann’s view. “A Chinese or foreign company operating in the zone can execute a foreign exchange payment to an associated company offshore with few restrictions. In connection with the recently introduced two-way RMB cross-border sweep, there is no need to apply for a foreign debt quota that is directly related to working capital in order to bring funds onshore. The Free Trade Zone allows the RMB to move more freely between on and offshore, and with fewer restrictions than before,” he says.</p> The overall effect of these reforms, direct stock market access and special zones is to create better conditions for corporate treasury management. “Treasury management in China has become more efficient for mainland corporates operating globally and for foreign subsidiaries in China,” asserts Brinkmann.</p> Mutual recognition</h4> Since 2009, the RMB has experienced multiple acts of liberalisation covering both the current and capital accounts. By now, current account has largely been liberalised so the RMB can be freely used and exchanged as a trade settlement currency for goods and services. Capital account-related reforms are expected to continue through gradual changes in regulatory schemes such as Renminbi Qualified Foreign Institutional Investor and Qualified Foreign Institutional Investor quotas, which improve access to the onshore securities markets.</p> Rex Wong, managing director, asset servicing, Asia at BNY Mellon, believes that the mutual recognition of investment products between Hong Kong and China will compel market participants and regulators to speed up product development and investor education. “The Chinese government has been supportive of the exchange-traded fund (ETF) market. Regulators are careful with ETF launches to ensure that market making is adequate. So the market is moving in the right direction,” he says.</p> In April, new rules were enacted to allow direct share trading between Hong Kong and Shanghai that reduced capital controls for up to 550 billion yuan of stock transactions. A total of 266 Hong Kong listed stocks and 560 mainland A-shares are included in the plan, known as the Shanghai-Hong Kong Stock Connect, as well as the constituent stocks of major indexes. Initially scheduled for 2007, Beijing delayed the plan due to concerns over cross-border currency management issues. But, after a series of successful reforms China moved ahead with the implementation of the scheme, which is another channel to directly gain access to onshore markets. The Shanghai-Hong Kong Stock Connect is due to go live before the end of the year, but a number of questions on fees and taxes are currently outstanding,</p> However, the Chinese government remains cautious about ‘hot money’ and carefully monitors the flow of forex trading and its effect on the renminbi. “The government is positive about seeing the renminbi used offshore for trade and investment. They are trying to gain confidence on the flows of renminbi and want to encourage its use as a reserve currency beyond just trade,” says Wong.</p> Complete liberalisation</h4> Technology platform vendors are carefully watching the RMB’s movements towards complete liberalisation in order to service Chinese and foreign clients. Ludovic Blanquet, Asia-Pacific business development director at Misys, observes, “The biggest challenge we face today is the existence of two parallel markets both from a business and technology point of view. There is a strong ‘Chinese wall’ between the domestic and the international market which creates a number of points of friction. These include higher operating costs, duplicated legal, control and compliance frameworks, arbitrage opportunities for the smartest players and higher capital costs.”</p> Progressive reforms, new platforms and services over the last ten years may result in free convertibility by 2020 according to a report from Standard Chartered. Opening up China’s capital account will create numerous challenges, but it represents the removal of the final obstacle for domestic Chinese businesses joining the world’s trade and financial markets, thereby improving their efficiency through healthy, free market competition.</p> </p> </p>