Download The ASEAN Chronicles of the Chinese Yuan

Excerpt from Insights 2012
The ASEAN Chronicles of
the Chinese Yuan
Lee Bee Bee, Director, Global Product Management, Transaction Banking
Anindita Ghosh, Associate Director, Global Product Management, Transaction Banking
The Association of Southeast Asian Nations (ASEAN) countries have played a significant role so
far in the strides China has made in the internationalisation of the Chinese yuan. With the
uncertain direction of the US dollar and the euro being weighed down by mounting debt
concerns, Southeast Asian business and banking communities have been increasingly eyeing
the yuan as an alternate international trade settlement and investment currency and are adopting
the ‘redback’ over the greenback for invoicing and payments. However, being still at an infancy
stage of currency internationalisation, more building blocks are needed before the yuan can
become a true global reserve currency.
The Rise of the Redback
Since the launch of the pilot renminbi internationalisation
scheme in July 2009, China has been making steady progress
in its efforts to position the renminbi (RMB), also known as the
Chinese yuan (CNY), as an international trade settlement
currency alongside the US dollar. Redenomination of trade
settlement in RMB went up by 310% between 2010 and 2011
to over RMB2.08 trillion. RMB-denominated trade comprised
8.3% of total Mainland trade in 2011 versus a mere 2.5% just a
year before in 2010.
Figure 1: Mainland trade settled in RMB
RMB billion
2010
2011
% of total trade
H1
67.0
0.7
H2
439.3
4.0
Annual
506.3
2.5
H1
957.6
8.6
H2
1,122.4
8.0
Annual
2,080
8.3
Source: Standard Chartered
The Hong Kong offshore RMB market
The launch of offshore RMB settlement in June 2010 by China
was a key step to speed up the voluntary adoption of the RMB
as a trade settlement currency, without causing premature
disruptions in the domestic market like inflation because of the
increased currency flows.
With China’s support, Hong Kong has fast developed as the first
offshore RMB business centre. The CNH is a fully convertible
cousin of the onshore CNY that is deployable offshore with the
only restrictions pertaining to remittance of the CNH into the
Mainland. The establishment of this offshore RMB deliverable
market in Hong Kong and the subsequent debt capital issuance
in the form of CNH bonds has led to a steadily growing pool of
RMB-denominated deposits outside mainland China.
RMB deposits in Hong Kong doubled from RMB314.9 billion in
the beginning of 2011 to RMB627.3 billion at the end of November
(see Figure 3). According to research by Standard Chartered,
RMB deposits outside mainland China could hit RMB6 trillion
by 2015. A total of 76 entities issued RMB ‘dim sum’ bonds in
Hong Kong totalling RMB99.1 billion by November 2011 – this
is 2.8 times of the amount issued in the whole of 2010.
Currently, the amount of RMB trade settlement conducted
through banks in Hong Kong is equivalent to more than 80% of the
Mainland’s trade settled in RMB. This shows that Hong Kong is
an important platform for offshore RMB trade settlement business.
The accumulation of offshore RMB has opened another door –
for borrowing in RMB. Recently, with the limited liquidity in the
global markets, many companies seeking to expand their
borrowing options have started also borrowing in CNH. Crossborder RMB financing by onshore entities is also picking up –
with the lower offshore financing cost often being the primary
commercial considerations driving this. However, RMB capital
account transactions in China, despite recent rapid de-regulation,
are still strictly monitored and require case-by-case approval.
ASEAN – Regionalisation before
internationalisation
While Hong Kong has become the primary offshore RMB
centre, the significance of ASEAN to China and its currency
internationalisation efforts continues to grow. Trade volume
between China and ASEAN in 2010 was 36 times what it was
in 1991. The volume is expected to reach USD500 billion by
2015, according to figures revealed at the China-ASEAN Beijing
Economic Forum held on 16–18 December 2011, boosted by
the China-ASEAN Free Trade Agreement launched in early
2010. China is now ASEAN’s largest trade partner while ASEAN
is ranked third-largest trade partner with China after the
European Union and the US. In the first half of 2011, ChinaASEAN trade was almost USD150 billion, representing 8.6% of
China’s total foreign trade.
It might be a natural development to grow the RMB as a regional
currency – as a precursor to taking it global. The ASEAN
countries, which include nations ranging from resource-rich
Indonesia to financial centre Singapore, are home to 600 million
people with a combined gross domestic product (GDP) of
USD2 trillion. In addition, they are a source of commodities such
as natural gas and crude palm oil, which are important to
support the Chinese economy. Hence, the ASEAN region is an
obvious test site for CNY regionalisation.
Total RMB foreign exchange (FX) trade in Singapore swelled to
SGD428 billion in 2011, a 10-fold jump from 2010. This cements
Singapore’s position as the second biggest offshore market for
RMB trade after Hong Kong. Singapore’s reputation as a major
trade redistribution centre and a gateway to the ASEAN region
has managed to attracted a steady stream of investors keen to
transact in RMB.
The other Southeast Asian markets of Thailand, the Philippines
and Malaysia are already seeing substantial redenomination and
RMB payment flows, and this will continue to grow as their
dependency on China trade increases. China has become
Thailand’s second-largest export market and its second-largest
USDbn
Figure 2: China-ASEAN Trade
500
450
400
350
300
250
200
150
100
50
0
500
356
293
213
2009
2010
2011
2012
2013
2014
2015
Source: Standard Chartered
Figure 3: RMB deposits in Hong Kong
700
RMBbn
600
500
400
300
200
Dec-11
Jan-12
Oct-11
Nov-11
Sep-11
Jul-11
Aug-11
Jun-11
May-11
Feb-11
Mar-11
Apr-11
Oct-10
Nov-10
Sep-10
Jul-10
Aug-10
Jun-10
Mar-10
Apr-10
May-10
Jan-10
Feb-10
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
Jun-09
0
Dec-10
Jan-11
100
Source: Hong Kong Monetary Authority
source of imports. China has also already signed bilateral
currency swap agreements with three ASEAN nations, namely
Indonesia, Malaysia and Singapore.
However, currency-wise, USD is still the most commonly used
currency as a means for trade transactions with China in the
region. While the growth statistics are impressive because of
the smaller base, one would question why the redenomination
to RMB remains slow in the ASEAN region and what can be
done to accelerate the internationalisation.
Internationalisation hits stormy weather
The pace of acceptance of RMB as an international trade
settlement and global reserve currency has been and may be
further affected by the global market volatility and fast
deteriorating economic climate. To become a true global reserve
currency alongside the US dollar, policy makers in China have
to make the currency fully convertible. This will be challenging in
the current economic climate as it could lead to an outbound
flood of hot money. This could have a compounding causeeffect relationship with the China economy and the valuation of
the RMB currency.
At the macro level, a global economic slowdown in 2012 is a
possibility. China’s growth slowed for four quarters consecutively in
2011 – with 8.9% in the fourth quarter, down from 9.1% in the third
quarter, 9.5% in the second quarter and 9.7% in the first quarter.
The World Bank has lowered China’s GDP growth forecast to 8.4%
for 2012, amid growing concerns about the effect of the European
debt crisis on the world’s second-largest economy.
RMB deposits in Hong Kong slipped after November 2011 by
8% to RMB575.9 billion at end of January 2012 (see Figure 3).
RMB payments have also declined in the past few months, as
per December 2011 SWIFT reports. Interestingly, the value of
payments sent and received by countries other than China and
Hong Kong, which is mostly the ASEAN corridor, has, however,
steadily increased over the past couple of months to 14% in
November 2011, from 3% in October 2010.
On the other hand, corporates in ASEAN countries still have
reservations about transacting in RMB. One of the key
considerations is FX volatility. Given the limited investment
channels currently available for the RMB, the only motivation for
overseas corporates to hold the currency is the expectation of
its further appreciation. However, with the recent grim economy
outlook around the globe, falling expectations of RMB
appreciation have led to a recent decline in deposits. The other
consideration is mobility. There are certain restrictions on the
movement of RMB in and out of China. Unless supported by
evidence of a genuine underlying corporate transaction, transfer
of RMB to a beneficiary in or outside China is almost impossible.
This has definitely discouraged corporate treasury managers
from using RMB in terms of global liquidity management.
Navigating through the storm
Chinese policymakers have already introduced and will
continue to introduce multiple accommodative trade finance,
FX and capital market measures to facilitate the RMB
internationalisation process.
It is evident that the usage of RMB in trade settlement is growing.
However, it is still highly concentrated in North Asia. We believe
there are plenty of opportunities outside North Asia, particularly in
the ASEAN countries, to increase the use of RMB as the currency
for trade invoicing. Corporates that deal with China counterparts
using RMB would benefit as it minimises FX risk with nondeliverable/deliverable forwards, lowers financing costs and
improves efficiency with the elimination of the export verification.
To elaborate, for ASEAN corporates buying from China, the
benefits of paying Chinese suppliers in RMB are hard to ignore.
When invoices are in USD, the Chinese supplier may factor RMB
appreciation into the price, hence reducing transparency. By
settling in RMB, corporations can significantly improve the terms
of trade. At the same time, the Chinese supplier also gets the
payment faster, which could allow it to release the goods sooner.
As for ASEAN corporates selling to China, if their customers
have the necessary clearance to get their onshore RMB
payments converted to offshore RMB, ASEAN treasurers will
have a lot more flexibility with the cash they generate. However,
treasurers need to keep in mind that there is currently still higher
risk of convertibility and transferability than with the USD.
We have observed that the People’s Bank of China (PBOC) has
been cautiously managing the internationalisation of RMB. Since
2009, there have been many regulatory changes with the aim to
increase the attractiveness of using RMB as a means for corporate
trade transactions. More recently, the RMB Foreign Debt Investors
scheme has supported increased channelling of offshore funds
back to mainland China, further opening up the market.
Demand for RMB bonds still remains high, but supply of CNYdenominated bonds is low and the return from CNH bonds has
also been relatively low, coming mainly from yuan appreciation.
While capital account flows are still restricted, greater certainty
regarding restrictions on moving proceeds of RMB bonds back
to the Mainland will help growth in this space.
Overall, for the currency to successfully internationalise, it requires
China’s willingness to end financial repression in the domestic
financial system, lift cross-border capital controls and allow the
RMB to appreciate. However, this is a double-edged sword in that
it may be detrimental to China’s economy, as RMB appreciation
would mean hurting the country’s export attractiveness.
The Redback’s ASEAN journey continues
The RMB constitutes only 0.31% of total global payments value
currently. Considering China’s 9.6% share of world trade in 2010,
the RMB can be deemed underutilised at the international level
and has potential for substantial growth to develop towards
a top global currency, if adequately backed by country
regulators and politicians. Globally, financial infrastructure will
require significant transformation to accomplish widespread
internationalisation.
According to some Chinese economists, trade between China
and ASEAN countries is expected to grow by 20–30% over the
next three years. With more bilateral swap agreements being
signed between China and the ASEAN countries, ASEAN central
banks will increasingly hold yuan as part of their FX reserves,
and this will subsequently make it easier for corporates to invoice
and settle in RMB, to take advantage of the potential gains
highlighted earlier.
Hence, the ASEAN region looks set to be increasingly
instrumental in the regionalisation and subsequent
internationalisation of the Chinese yuan as it moves towards
becoming a true global reserve currency.
Lee Bee Bee
Lee Bee Bee is with Standard Chartered Bank’s Global Product Management team within Transaction Banking, based in Singapore.
She manages the RMB corporate commercialisation and product proposition for global corporate for the bank globally. She has
more than 10 years of experience in transaction banking and cash management and joined Standard Chartered in 2007. Prior to that,
she worked for HSBC Singapore heading the cash management business implementation and client service teams. She holds a
Bachelors degree in Economics/Maths from the National University of Singapore.
Anindita Ghosh
Anindita Ghosh is with Standard Chartered Bank’s Global Product Management team within Transaction Banking, based in Singapore.
She has been responsible for establishing and championing the RMB business for the bank in South East Asia. She joined Standard
Chartered in July 2006 post an Honours degree in Mathematics and an MBA in Finance and has cross-geographic experience in a
range of roles across consumer banking, strategy and corporate transaction banking product management.
Jul 2012
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