While the swift internationalization of the RMB slowed to a crawl last year, HSBC in its latest report remains as certain as ever that the Chinese currency is close to integration and that Xi Jinping’s Belt Road Initiative (BRI) strategy holds the key to the currency’s worldwide catalysation.
With many foreign investors displaying a less than fulsome embracing of RMB holdings following concerns of burdensome capital controls or currency interventions, HSBC’s Qu Hongbin still expects the middle kingdom to follow its middle road approach to RMB internationalisation and continue to open up the onshore asset market.
“The RMB internationalisation is expected to benefit from the rising tide of BRI-related business flows, as financial integration is an important part of the BRI strategy,” Hongbin said.
With China’s increasingly global domestic commercial banks being actively encouraged to promote RMB trading, commodity pricing and settlement, the RMB’s recent inclusion in the IMF’s SDR (Special Drawing Right) basket and further opening up of domestic financial markets could boost RMB-denominated financial assets held outside of China.
Seize the day
According to HSBC, in addition to the RMB in trade settlement, the government’s aim is to build a framework based on “investment, financing and a credit information system through expanded bilateral currency swaps” as well as, critically, a greater openness in the Asian bond markets, will consequently increase the use of the RMB for financing.
China’s central bank, the People’s Bank of China’s (PBoC), has previously described the BRI as a reliable "catalyst for supporting RMB internationalisation and financial reform".
In a 2015 report on the currency’s internationalization, the PBoC directed China and its partners to "seize the opportunity" of the BRI to raise the proportion of the yuan in trade pricing and settlement as well as increasing the use of the RMB in FDI, trade financing, and loan and bond issuances.
The RMB’s global integration has been a long-held objective and core strategy for Chinese officials, with the central bank planning to further promote RMB settlement in trade, investment, financial transactions and, finally, as a global reserve currency.
There is, however, work to do according to a report by the International Monetary Fund released last week, the RMB’s global FX reserves crept higher to 1.1 per cent of total reserves by the end of last year, still a stretch behind the world’s major currencies.
Offshore RMB market
According to HSBC’s Hongbin, as the government is encouraging domestic companies to participate in BRI projects, Chinese companies with RMB-denominated balance sheets operating in countries hosting BRI infrastructure projects should increase the pool of RMB liquidity globally.
“Those non-Chinese companies in host countries involved in BRI projects also have an incentive to hold RMB liquidity,” he said. “This will help facilitate the development of the offshore RMB market.”
According to HSBC, demand for RMB bond issuance to fund BRI infrastructure projects “consistently face liquidity shortages in all currencies".
Existing multilateral financial institutions, such as the Asian Development Bank, World Bank, New Development Bank and Asian Infrastructure Investment Bank, may not be able to provide sufficient funding, given the sheer size of the likely demand – which is potentially some $US8 trillion, according to the ADB.
“This gives RMB funding a competitive advantage, given the limited supply of liquidity in other developed market currencies, such as the USD or the EUR,” Hongbin said.
Steady economic growth momentum and a relatively stable currency remain the fundamental driving forces for RMB internationalization, according to HSBC.
“That said, financial transactions could help RMB internationalisation grow rapidly in a short period of time. Longer term, the internationalisation of the currency will rely on demand in the global market for products associated with the 'Made in China' and 'Created in China' policy initiatives,” Hongbin said.
“We expect the BRI, although still in the first phase of development, to be the new driver of the next stage of RMB internationalisation, both from a demand-driven perspective as well as via the reform process,” he concluded.