A Delicate Stage: The Future of the RMB as a Global Investment Currency

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A delicate stage:The future of the renminbi as a global investment currencyA report from The Economist Intelligence Unit

© The Economist Intelligence Unit Limited 20151

A delicate stage: The future of the renminbi as a global investment currency

Contents

Executive summary 2

About the research 5

Introduction: Taking stock of reform 6

Driving and enabling usage 6

Fully convertible in five years 8

The PBOC speaks: Not far away from convertibility… but not near, either 9

Demand drivers: Undoubted potential 10

Growing RMB-related revenues 10

Focusing on core competencies 11

What’s driving demand? 13

Enabling adoption: Perceived problems 15

Regulatory roadblocks 15

Liquidity and other concerns 17

Enabling adoption: Sought-after solutions 19

The need for legal clarity 19

Let the market work 21

Practicality and prestige 22

Preparing for a global RMB 23

Reluctant to commit 23

It’s still about the guanxi 24

An overseas opportunity 25

The front line of RMB innovation 26

Ready for lift-off 26

Conclusion: Towards a common currency 27

China’s responsibility? 27

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Executive summary

China’s currency, the renminbi (RMB), is already internationalised: it ranks fourth globally by value of payments, behind only the US dollar, the euro and the British pound. The size of China’s economy and its dominant position in international trade mean that its use in transactions is already commonplace. Yet it is still not comparable to the four major denominations (including the Japanese yen) as an investment currency—i.e. one that is freely usable and enjoys the full confidence of international investors and the companies that service them. Without their support, the RMB cannot reach full maturity.

Until recently it seemed inevitable that China would take the steps necessary to win their confidence and that the RMB would soon join this elite band of global investment currencies. Yet the events of the summer of 2015, during which China’s authorities sought unsuccessfully to prop up a collapsing stock market and also suddenly devalued the RMB’s exchange rate anchor (ostensibly to take market forces more into account), raised questions about the country’s commitment to liberalising its capital markets. Doubts were reinforced by successive data points that suggested its economy was slowing far more rapidly than expected.

At this crucial juncture, with global hype about the RMB cooling rapidly, UKTI commissioned The Economist Intelligence Unit (EIU) to survey over 200 senior executives from financial institutions about the long-term future of the RMB as an

investment currency—100 each from companies headquartered in China and outside it. Looking beyond recent short-term volatility, the research asks about perceived demand for international usage of the RMB, what reforms are most urgently required, and what steps global financial services companies must take to prepare for a world in which the RMB vies with the US dollar.

The EIU also conducted in-depth interviews with a range of market participants and experts for this report, globally and in China, including with senior officials from the People’s Bank of China (PBOC), China’s central bank.

Key findings of the research include:

A market-driven process—with Chinese characteristicsChina’s central bank says it remains committed to opening the country’s markets and making the RMB freely usable, but the process will require some control:

l The PBOC underscores the need for control as markets open and the RMB becomes an investment currency. “We remain committed to liberalising [China’s markets], but might still need some control,” says Yao Yudong, director general of the PBOC’s Research Institute of Finance and Banking. “We don’t really have a framework [for the



internationalisation of the RMB]. It’s really driven by market forces... We are shifting from RMB use in trade settlement toward other assets, and the RMB is gradually being regarded as a reserve currency, which depends more on things like local interest rates and whether we can give better returns for investors.”

l The PBOC says that the RMB is “not far from convertibility”. But the steps needed to make this a reality are major ones. Senior officials from the central bank say substantial progress in liberalisation is needed in three key areas: opening up the channels of individual cross-border investment, amending regulations on foreign-exchange administration, and facilities for foreign investors entering domestic capital markets. “If we achieve progress in all three areas then the RMB may well fulfill the criteria for it to become freely usable, or convertible,” says Tang Xinyu, director of the PBOC’s Monetary Policy Department II.

Despite recent events, the RMB’s global status looks assuredThe stock market crash, the aborted intervention to prop it up and the RMB’s sudden devaluation haven’t changed the currency’s long-term trajectory:

l Most financial services executives still expect a fully convertible RMB in around 5 years; full maturity in 7-10

Around two-thirds (63%) of China respondents to the EIU’s survey and three-quarters of those offshore (78%) think that the RMB will become fully convertible and tradable without restrictions in around five years’ time. Majorities of both groups believe it will take only slightly longer (7-10 years) for the RMB to become a global investment currency.

l Most Chinese firms (and many offshore) think the RMB will overtake the US dollar

Sixty percent of China respondents believe the RMB will surpass the US dollar as the world’s most commonly used currency within the next decade and 94% of say that this will happen eventually. Global firms are more sceptical—doubtless influenced by the events of the summer—but one in five think the dollar’s pre-eminence will be challenged within 10 years and 45% think this will happen eventually.

l Global financial services firms still expect international RMB business to soar

Currently only a minority (11%) of global financial institutions earn more than 10% of their revenues from RMB-related business, but nine out of ten expect to hit this mark within five years and a majority (57%) expect the RMB to account for at least 20% of revenues within the next decade.

l Global firms still see the potential in onshore equities—but want full access before committing

Perhaps surprisingly, global financial services companies see onshore equities as one of the fastest-growing international RMB business area over the next three years. Yet a majority (52%) also say they would be unwilling to grow their business related to onshore equity markets without complete liberalisation in this area, suggesting many are unwilling to commit until investment quotas and other controls are eradicated.

Regulatory and legal reform will be needed for full RMB maturityIf the RMB is going to become a global investment currency, regulatory reform is urgently required:

l Restrictive regulations are the top barrier to global RMB usage

Restrictive regulations are the most commonly cited problem in handling the currency by both



on- and offshore financial services companies. Across various asset classes and business lines, substantial proportions of respondents say either that they cannot grow their business without further liberalisation, or that they are reluctant to do so without clarification. This is most acute for RMB-denominated debt and alternative investments.

l The market should be left to workDoubtless influenced by the events of the

summer, financial institutions in China put “less government intervention in onshore equity markets” at the top of their list of urgently required policy reforms, while for global respondents it is in second place. In both cases it ranks above other laissez-faire policies often cited as reform priorities, such as interest rate liberalisation and a free floating exchange rate.

l Legal, technical issues also need addressingThe liberalisation of China’s legal services

market is the most common policy reform sought by global respondents and is ranked second by those in China, perhaps prompted by worries about legal ownership of securities that attended the approval this summer of Hong Kong investment funds for sale in the mainland (and vice-versa). In terms of supporting market developments, global companies prioritise the speedier rollout of common technical standards such as the China International Payment System (CIPS), which was set for launch as this report went to press.

To succeed, financial services companies need to drive the processThe evolution of the RMB as a global investment currency requires global financial firms’ active participation. What do they need to do to succeed?

l Relationships with China’s authorities will remain crucial

As long as the global adoption of the RMB depends on policy decisions in Beijing it remains crucial to keep good links to regulators and authorities: improving such ties is the top priority to increase their RMB business, global respondents say. One way to do so is to be seen actively promoting the RMB as an investment currency: a bid to gain favourable positioning with authorities is seen as one of the most important drivers of RMB business for global companies over the next three years.

l Global firms need to invest, innovate and drive the market

Global financial companies recognise that a lack of liquidity and offshore risk-management products are key barriers to the global adoption of RMB as an investment currency, ranking second and third behind restrictive regulations. Though policy reform will play a large role, firms globally and in China recognise the onus is on them to innovate and develop products to help meet demand. Investing in building up their own capabilities would also help: only minorities of global firms have dedicated teams focusing on RMB product development.

l Global RMB leaders are actively engaged in the currency’s future

Financial services firms that already earn more than 10% of their total revenues from cross-border RMB related business tend to put a greater emphasis than their less-advanced peers on understanding global RMB demand, and in interacting with clients to determine this. They are more likely to have in-house research teams monitoring the currency. They also agree more strongly that the evolution of the currency toward global investment status is an issue that will partly decided by developments outside of China’s control, seeing themselves as participants, not bystanders, in that process.



About the research

In August 2015 The Economist Intelligence Unit surveyed 202 senior executives from financial services companies, of which 48% were C-level executives and 52% heads of department or senior managers. Of these, 102 were from institutions headquartered in mainland China and 100 from companies headquartered in international/offshore financial centres (including the US and UK, Singapore, Hong Kong, Taiwan, Canada, Australia and India).

Companies surveyed in China had assets of at least RMB50bn (US$7.8bn), while those in the rest of the world had assets over US$50bn. All companies surveyed had some involvement in international RMB products and services, with approximately equal proportions of banks, securities firms, asset managers and asset owners represented. Respondents worked in a range of functions, including portfolio management, risk, compliance, sales and marketing, and middle/back offices.

Tom Leander was the author of this report and David Line was the editor. Wu Chen, Duncan Innes-Ker and Edel McCormack provided additional research and reporting. The contents of this report are the sole responsibility of the EIU and its findings do not necessarily reflect the opinions of the sponsor.

We would like to thank all the survey respondents and interviewees for their time and insights.

Interviewees, listed alphabetically by organisation:

Allen & Overy, Jane Jiang, Partner

Asian Development Bank, Jurgen Conrad, Head, Economics Unit, Beijing

China Minsheng Bank Research Institute, Huang Jianhui, Dean

Crédit Agricole CIB, Benjamin Lamberg, MD, Head of Global Debt Markets, Asia Darius Kowalczyk, Economist and strategist

ICBC, Zeng Qi, General Manager, Transaction Banking

ICBC Credit Suisse Asset Management (International), Richard Tang, Chief Executive

London Stock Exchange Group, Nikhil Rathi, Director, International Development

Mandarin Capital Partners, Alberto Forcielli, Founder

People’s Bank of China, Yao Yudong, Director General, Research Institute of Finance and Banking

Xie Huaizhu, Director, Research Institute of Finance and Banking

Tang Xinyu, Director, Monetary Policy Department II

Singapore Stock Exchange, Janice Kan, general manager for Greater China



Though the RMB is now used across the world, close control of its usage means it is not yet a global investment currency. It will soon become one.

The stock market crash and subsequent events in China over the summer of 2015 raised questions about the opening of its markets and its integration into the global financial system, developments that for many years had seemed inevitable. China’s central government appeared wrong-footed by the volatility and power of the market forces it had promised it would allow to play a “decisive role” in economic policy.1 Where did this leave its other policies designed gradually to allow the greater flow of capital across its borders and to promote the international use of its currency, the renminbi (RMB)?

The RMB is already a global currency: it ranks fourth globally by value of payments, according to SWIFT, a financial communications network, outranked only by the US dollar, the euro and the British pound.2 But strict controls on its usage mean it cannot yet be considered a global investment currency in the same sense as the the “big three”, or the yen. A global investment currency must be freely convertible, and investors and companies should be able to move it across borders easily. It should be commonly used to price securities and other assets that can be traded

1 As a communiqué issued after the landmark third plenum of the Chinese Communist Party’s 18th Central Committee, in November 2013, put it.

2 As of August 2015. See http://www.swift.com/assets/swift_com/documents/news/RMB_stellar_ascension.pdf

internationally. It should enjoy the full confidence of international investors as a store of value and unit of exchange. It should account for comparable volumes of foreign exchange as these currencies and, arguably, it should be used as an international reserve currency.3 On many of these issues the RMB is not there yet.

Driving and enabling usageMeeting these criteria requires that there must be sufficient drivers of demand for the usage of the currency—in China and internationally—and an environment that enables its adoption. Certainly many of the demand drivers are evident, not least because China is already the world’s largest trading economy and its biggest exporter. Companies are now emerging in China as global competitors, investing overseas and looking to do so in RMB. Likewise, companies outside the country now look to increase their use of RMB to save in transaction costs and seize opportunities in China. Investors outside China want to invest in its companies and those inside the country want greater access to global markets.

From a policy standpoint the current government has also made the rise of China’s global economic influence a priority. President Xi Jinping’s government has launched the Asia Infrastructure Investment Bank (AIIB) as an alternative to the World Bank and the International

3 This definition of a “global investment currency” was used in the survey and applies throughout this paper.

Introduction: Taking stock of reform1



Monetary Fund, and the “One Belt One Road” initiative to support trade across Asia, the Middle East and Africa. At the same time China is also lobbying intensively for the IMF to include the RMB in its reference basket for special drawing rights, or SDR, a move that would bolster its use as a reserve currency.

Nevertheless, the power of a global investment currency redounds in the faith of its users. Their confidence is supported by the credit standing of the nation and more mundane elements, such as a payment infrastructure, products and services available in the denomination, and—crucially—regulatory clarity. China’s advances in these elements have been fast, but perhaps not as swift as the hype suggests, nor as clear as global investors would wish.

With this in mind, confidence in the RMB’s progression toward internationalisation is perhaps surprising. “Where does the confidence in the RMB come from, if China hasn’t completed building the infrastructure to guarantee the RMB as an international currency?” asks Jurgen Conrad, head of the economics unit at the Asian Development Bank’s resident mission in Beijing. “Market players have been paying close attention to the development in the policy arena. Overall, in the past few years, they’ve seen that policymaking is moving towards more liberalisation.”

Those moves have been piecemeal. China’s tight control of the economy has led to an historical anomaly: a top-five currency that is traded onshore (as CNY) and offshore (as CNH), but with fundamental differences in how it can be used in each place. The offshore market grows in vitality and importance each year, yet is still vexed by liquidity problems. The various policies regulators have unveiled to facilitate cross-border capital flows (QDII, QFII, RQFII, Stock Connect, Mutual Recognition of funds, onshore free-trade zones and so on) are confusing and have often made financial services companies reluctant to invest in growing their RMB business without further clarity.

Meanwhile, the “plumbing” that is needed to ensure smooth global currency flows—and that is taken for granted with the G4 currencies—is only partially built. Foreign exchange trading is conducted only in certain designated locations offshore, with a limited number of clearing banks. Development of an international payments system has met with delays (though is expected to be launched soon). Risk management products are available, but only in basic forms, and restrictions hobble the development of more complex products.

To some degree this is a matter for China’s policymakers to rectify. But it also depends on the active participation of institutions meeting their

❛❛ Where does the confidence in the RMB come from, if China hasn’t completed building the infrastructure to guarantee the RMB as an international currency?❜❜Jurgen Conrad, head of the economics unit, Asian Development Bank, Beijing

How long before the RMB becomes…(% respondents; RoW = rest of the world)

Figure 1

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RoWChinaRoWChinaRoWChinaRoWChinaRoWChinaRoWChina

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48

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3 6743 3 1 0 0 01

Source EIU survey

Under 3 years Around 3 years Around 5 years Around 7-10 years Longer than 10 yearsbut it will happen

eventually

The RMB will neverreach this status

Fully convertible/tradable with no restrictionsA major global investment currencyThe world’s most commonly used currency(surpassing the US dollar)



clients’ needs. Richard Tang, chief executive of ICBC Credit Suisse Asset Management, a money manager, charges banks with not moving quickly enough, or in a united way, to support the basics that enable any currency to rise. “Instead of talking about promoting it they should do more to build the basics outside of China: basic infrastructure, basic products and basic services. Right now, that ecosystem is only just coming to life.”

Fully convertible in five yearsThe timing of the fieldwork for the survey—conducted in August 2015—turned out to be apposite. The RMB’s progress can often be hyped, but the stock market crash and concern over the pace of reform presented an opportunity to gather more measured responses. Despite the circumstances, confidence in the currency still abounds. A strong majority of respondents onshore

(63%) and offshore (78%) think that the RMB will become fully convertible and tradable without restrictions in around five years’ time (Figure 1). Majorities of both onshore and offshore respondents believe it will take longer (7-10 years) for the RMB to become a global investment currency.

Onshore and offshore views diverge on the long-term future of the currency, though. Sixty percent of China respondents believe the RMB will surpass the US dollar as the world’s most commonly used currency in the next decade, compared to just 21% globally. Some 94% of China respondents say that the RMB will surpass the dollar eventually; just 45% globally believe so. Either way, its future as a global investment currency seems still to be assured, even if other responses to the survey raise questions about both the drivers of this process and what steps will be necessary—on the part of the authorities and market participants—to make this happen.



“Expanding the currency’s use offshore would be helpful,” senior central banker says in exclusive interview

Yao Yudong, director general of the Research Institute of Finance and Banking at the People’s Bank of China (PBOC—the country’s central bank) and other senior officials spoke to the EIU in an exclusive, wide-ranging interview for this report on October 1st , with severe market volatility a recent memory.

In the wake of the stock market crash in China, “We remain committed to liberalising [China’s markets], but might still need some control,” says Mr Yao. “Even the IMF recognises the need for controls against money laundering, and to guard against extreme market movements.”

Regarding the sudden drop in the value of the currency after an adjustment to its peg in August, “The problem is the perception that depreciation indicates troubles in the domestic market,” Mr Yao says. Rather, “China is transforming gradually, and the message is about reform rather than devaluation.”

In that light, Mr Yao characterises the central bank’s approach to reform as more responsive than planned.

“We don’t really have a framework [for the internationalisation of the RMB]. It’s really driven by market forces,” he says. “In the first half of 2015, 26% of trade volumes were settled in RMB. Six years ago it was about 1%. We are shifting from RMB use in trade settlement toward other assets, and the RMB is gradually being regarded as a reserve currency, which depends more on things like local interest rates and whether we can give better returns for investors.”

Tang Xinyu, director of the PBOC’s Monetary Policy Department II, sees the path to full convertibility as a matter of progress in three areas. However, since these cover

nothing less than moving money into and money out of China, they are hardly minor line items, but the foundation of the entire reform agenda itself.

“Our assessment is that we are not far away from full convertibility, if we achieve progress in three key areas,” Ms Tang says. “The first is opening up channels of individual cross-border investment. At present individuals, both resident and non-resident, have limited channels to invest each other’s market and are subject to some ex-ante approval procedures, which is a key area we are working on. The second is amending regulations on foreign-exchange administration, removing most of the ex-ante procedures and establishing an effective ex-post monitoring mechanism. The third is more facilities for foreign investors entering the domestic capital markets. If we achieve progress in all three areas then the RMB may well fulfill the criteria for it to become freely usable, or convertible.”

Offshore participation is neededCrucially, the central bank sees the market’s participation offshore—where the PBOC has no control—as important to liberalisation.

“Expanding the currency’s use offshore would be helpful,” says Mr Yao, adding that “the expansion of currency deposits overseas would improve matters.” He admits, however, that China’s high savings rate is an obstacle for China to inject RMB into offshore markets through the current account. “We have facilitated firms to invest overseas, and said that insurers can hold 15% of assets overseas, but they often find foreign assets too expensive.”

Stimulating private demand overseas would be an outcome of the RMB’s inclusion in the IMF’s basket of reference currencies for its Special Drawing Rights (SDR). A decision on whether to include the currency may come

as early as the final months of this year. Xie Huaizhu, director of the PBOC’s Research Institute of Finance and Banking, describes this as “important”.

“At present the central banks of 47 countries use the renminbi as a reserve currency,” she explains. “That would rise to 188 if the renminbi was included in the SDR basket. We have facilitated central bank entry into onshore markets, and greater central bank holding of renminbi as reserve assets would also stimulate private demand.”

On improving the technical trading needs of companies and asset managers, Ms Tang says the regulator relies on their support and active participation, and that policy is shaped only after consultation with these stakeholders. This process, perhaps, will be visible with the rollout of the China International Payment System, or CIPS, scheduled for October (as this report goes to press). Ms Tang describes CIPS as a parallel infrastructure alongside the existing onshore CNAPS, aimed at improving the efficiency of transactions of cross-border RMB flows in terms of trading time, language, risk and liquidity management. CIPS is based on the internationally adopted ISO20022 code, and will operate from 9am to 8pm Beijing time, partly covering the Asian, Oceania and European time zones.

Though the PBOC says it has no framework for RMB internationalisation, it knows definitively what it will not choose as a model. “The US is not our example,” says Mr Yao. “We draw more on the lessons from the Japanese yen. China’s development stage is now more like Japan’s, as the yen was increasingly used during the 1970s and then the systems were liberalised in the 1980s. Japan also experienced a slowing economy over this period, and into the 1990s. So we would take the experience, as well as lessons [from Japan].”

The PBOC speaks: Not far away from convertibility… but not near, either



Financial services firms globally see swift growth in their RMB business. Those in China are keen to globalise but are conscious of greater domestic competition as its markets open.

Growing RMB-related revenuesThe global ecosystem for RMB products and services is poised for growth, from a relatively low base. International RMB products and services still represent a relatively small proportion of offshore financial institutions’ business, with just 11% saying they account for more than 10% of total revenues (Figure 2a). For China respondents, international business in their home currency is naturally more significant: 78% say more than 10%

of their revenues comes from international RMB products and services (and 45% more than 20%—Figure 2b).

Both offshore and onshore businesses expect accelerating growth, despite concerns about the pace and extent of reform and recent market volatility. In three years, 42% of global financial services businesses see more than 10% their revenues coming from international RMB business, and in five years 89% expect RMB-related revenues at this level. Looking ahead ten years—by which time they expect the RMB to be a global investment currency on a par with the US dollar and euro—a majority of global respondents (57%) think that 20% or more of their revenues will come from international RMB products or services.

Demand drivers: Undoubted potential2

What proportion of your company’s total revenues do you expect international RMB products and services to account for…(% international respondents)

Figure 2a

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89

9 9 8 1017

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Source EIU survey

NowIn three yearsIn five yearsIn 10 years



This reflects strong growth in RMB usage and capability among clients. Benjamin Lamberg, managing director and head of Asia debt markets for Crédit Agricole CIB, reports that three or four years ago the RMB was seen as a currency to exit quickly. Then, the prevailing opinion was “let’s hedge it as fast as we can, let’s not stay exposed to this exotic currency,” he says. “Or, equally, let’s get paid in euro and US dollars, and avoid RMB altogether.” Now, clients sing a different tune. “Now they are comfortable to keep their exposure in USD, euro, yen—but also RMB. And if they need a swap they call us right away. And they’re pushing us to offer them more sophisticated cross-border solutions in RMB.”

Responses from onshore institutions reflect an already robust global business in RMB and its status as an international currency despite remaining capital controls. Currently, 45% say more than 20% of their revenues are from international business. And expectations of growth in international revenues are equally bullish. Some 73% of onshore respondents expect international RMB products and services to account for more than 20% of their revenues in three years. In five years, the proportion climbs to 88%. About one-third (32%) of China respondents forecast that international RMB business will be 50% or more of their revenues in five years.

A drive to globalise plays a part. Onshore institutions are gearing up to become international

players, responding to the rapid development of offshore RMB trading centres, which abets growth in offshore transaction volumes and can attract greater participation by Chinese companies expanding overseas into developed markets.

In the view of Zeng Qi, general manager for global transaction banking at ICBC, the two trends support a virtuous circle, leading to higher RMB transaction volumes. “For ICBC, we’ve seen increased usage of RMB since ICBC became the settlement bank of RMB and local currency in local markets,” she says. “The more foreign firms deal with Chinese firms, the more usage there is of RMB. Some have chosen RMB as a trade settlement currency, because of cheaper transaction costs.” Instead of local currency being converted to US dollars and then to RMB, “now many currencies can be traded directly with RMB.”

Focusing on core competenciesWhat kinds of international RMB business will see the strongest growth? Onshore respondents pick capital raising products and services as the fastest-growing business area over the next three years, while it ranks second-to-last among those offshore. Global respondents are marginally more bullish than their peers in China about prospects for M&A advisory, onshore equites and equity derivatives (despite the events of this summer), and forex (Figures 3).

What proportion of your company’s total revenues do you expect international RMB products and services to account for…(% China respondents)

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❛❛ The more foreign firms deal with Chinese firms, the more usage there is of RMB.❜❜Zeng Qi, general manager for global transaction banking, ICBC



This reflects the respective competencies of the institutions themselves. Onshore firms have longstanding relationships with expanding Chinese companies and have likely participated in major capital raisings as these companies have grown. They now expect to support these firms’ global ambitions. Offshore institutions, meanwhile, have built expertise in cross-border M&A advisory—a lucrative business that allows for access to underwriting equity and debt issuances associated with deals—and are vying to bring this competency to cross-border RMB transactions. Foreign exchange specialists in offshore centres, most notably London and Singapore, also see strong potential to grow RMB business. Since forex underpins all international currency usage, forecasting growth here is understandable.

Despite recent volatility, offshore players clearly see onshore equities in general as a still attractive growth area, running contrary to the general belief that they were shaken by the summer market turmoil. Nearly one-third (29%) expects growth in business related to this sector over the next three years, making it the second-hottest prospect (along with forex).

The optimism is bolstered by improved market access. FTSE Russell, a compiler of indices, included China A Shares in two new transitional emerging

markets indices in May 2015, saying it had made the decision following increases in RQFII allocations and improvements in the RQFII application process. Although MSCI, another index provider, deferred a decision the same month to include RMB-denominated stocks in its benchmarks, it said it eventually intends to do so after settling such obstacles as ease of access and investment quotas with regulators.

MSCI estimated that including A shares in the benchmark would have injected about US$400bn in funds from asset managers, pension funds and insurers into mainland equity markets. When that move does come, it will represent a significant milestone in the growth of RMB investment.

What’s driving demand?Views of the top drivers of growth reflect the ambitions of the respective cohorts in the survey, as well as their awareness of the political context in China. Onshore institutions are most likely to name a growing base of international clients seeking to invest in China as a key reason for the expansion of international RMB business over the next three years (cited by 45%). Growing demand for risk mitigation products and services related to international investing in RMB is also important (Figure 4a/i), a natural reflection of expanded

Fastest-growing international RMB business areas over next three years (% respondents selecting in top three)

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Source EIU survey

China

Rest of the World

M&A advisory Forex Onshore equities and

their derivatives in general

Wholesale lending

Offshore equities and


Corporate finance (cash management/

transaction banking)

Offshore institutional

asset management

services

Offshore retail asset

management/ wealth

management services

Risk management

services

Offshore bonds/fixed

income products and


Capital raising products/services

Onshore bonds/fixed

income products and


46 5835 5135 4727 3936 3635 3635 3432 3336 3240 3136 2834 27

20 3025 2925 2918 2825 2528 2423 2325 2325 2327 2231 2026 17



hedging needs as this base grows. Both responses suggest that global companies

are increasingly turning to Chinese institutions for their expertise in handling RMB cross-border business. But there is a recognition that this advantage will not necessarily endure as China’s markets open: in the longer term, China’s financial services companies recognise the increasing importance of building capacity to stay competitive (Figure 4a/ii). China’s financial services companies also foresee that servicing Chinese clients going overseas will also become a higher priority.

A key short-term driver for both onshore and offshore institutions reflects the impact of doing business in largely controlled economy. More than one-third of the onshore respondents (38%) say gaining a favourable position with authorities ahead of further liberalisation will continue to be

an important driver of growth in their business, and a similar proportion (36%) also name winning government-linked business. But this is not a factor they expect to persist in the longer term.

Rest-of-the-world respondents seem even more acutely aware of the political milieu, with 47% saying that gaining favourable positioning with authorities ahead of further liberalisation is a top driver of their China business (a view that persists when taking the longer view, with the top four growth drivers unchanged—Figures 4b/i and 4b/ii). The figure reflects the apparent view in offshore institutions that it will be necessary to show fidelity to the government’s goal of internationalising the currency to secure expanding RMB business, and suggests that international players see themselves as beneficiaries of liberalisation only if they are viewed by regulators as participants in the process.

Top five drivers of growth in next three years—China (% China respondents selecting in top five)

Figure 4a/i

Source EIU survey

Growing client base of non-China multinationalsseeking to improve/optimise their RMB capability

To gain favourable positioning with authoritiesahead of further liberalisation

Growing demand for of risk mitigation products/services related to international investing in RMB

Growing base of international clients seeking toinvest in China

To win government-linked business

45%

40%

38%

36%

36%

Top five drivers of growth in longer term—China (% China respondents selecting in top five)

Figure 4a/ii

Source EIU survey

Continued growth of business in existing offshoreforex trading centres

Growing base of Chinese clients seeking toinvest overseas

Growing demand for of risk mitigation products/services related to international investing in RMB

To build capacity to stay competitive (ascompetitors expand their capabilities in these areas)

Growing base of international clients seekingto invest in China

33%

31%

31%

30%

28%



However, market drivers are equally important to the offshore institutions, with about half (47%) naming continued growth in business in existing offshore forex trading centres as an underlying

catalyst to grow RMB business, while 44% say that increased pools of offshore RMB and increased offshore liquidity in general is driving transaction growth.

Top five drivers of growth in next three years—RoW (% international respondents selecting in top five)

Figure 4b/i

Source EIU survey

Increase in offshore RMB bond marketunderwriting business




Increased pools of RMB offshore/increasedoffshore liquidity in general

47%

47%

46%

45%

44%

Top five drivers of growth in longer term—RoW (% international respondents selecting in top five)

Figure 4b/ii

Source EIU survey

Increase in offshore RMB bond marketunderwriting business




Development of new business in new offshore forextrading centres

49%

46%

46%

45%

41%



Regulations are the biggest barrier to the growth of global RMB business, with many financial services firms reluctant to invest until liberalisation proceeds. Liquidity and a lack of risk management products also pose problems.

Despite its rapid rise, the fact remains that when it comes to using the RMB across borders, much of the established infrastructure that is taken for granted when transacting in a G4 currency—such as common technical standards, risk management instruments, counterparty experience and, crucially, clear rules—doesn’t yet exist. In its place is a patchwork, stitched together as the fabric grows and as regulations permit.

Regulatory roadblocks

The two groups surveyed in this report cite restrictive regulations as the top problem they face in handling the currency, with a majority (58%) of international respondents citing this reason, and a near-majority (46%) in China saying likewise (Figure 5). This is despite frequently publicised reforms to cross-border handling of the currency—such as easing of controls over repatriation of RMB funds raised offshore, the advent of cross-border cash pooling, intercompany lending across borders in RMB and so on—and some high-profile steps to broaden the access of offshore investors to Chinese assets and vice-versa, such as Shanghai-Hong

Enabling adoption: Perceived problems3

Top problems in growing international RMB business (% respondents selecting in top three)

Figure 5

0

10

20

30

40

50

60

58

18

46

35 35 36 36 36 36 3640

3128

35 35 34 3432 323327 27

39

4751

Source EIU survey

China

Rest of the World

Restrictive regulations

Lack of liquidity in relevant

markets

Lack of relevant risk-

management products/ services offshore

Poor communication

with counterparties

Reduction in arbitrage

opportunities between

offshore and onshore

interest rates

Speed of change of rules and regulations

Lack of common technical standards governing

trades

Lack of internal experience with

international RMB

transactions, products or

services

Lack of relevant risk-

management products/servic

es onshore

Lack of clarity on rules and regulations

Lack of counterparty

experience with international

RMB transactions, products or

services

High failure rate of trades/

transactions, or higher

transaction costs in general

46 5835 5135 4727 3936 3635 3635 3432 3336 3240 3136 2834 27



Kong Stock Connect, mutual recognition of investment funds between Hong Kong and the mainland, and widening cross-border investment quotas.

The lack of clarity in regulations has a direct impact on the willingness of financial services firms—both globally and in China—to invest to grow their businesses (and thereby support the internationalisation of the currency). A substantial proportion of businesses are likely to say either that they cannot grow their business without further liberalisation, or that they are reluctant to do so without further clarification on practice and regulation. Significant minorities are unwilling to invest further without complete liberalisation (Figure 6).

Often, how restrictions are eased becomes an issue. When a new measure is introduced by regulators, it is published by the relevant authority and left to market participants to grasp how the rules should be interpreted. “It is difficult to stay up to date; it requires a good amount of time and effort,” says Mr Lamberg of Crédit Agricole. “There are new regulations and texts published by the People’s Bank of China or the China Securities Regulatory Commission on a very regular basis. And then there is an interpretation of this new set

of rules, and we need to see how it’s being applied. Every time there is a change in securities law, traders in charge of an asset class will reach out to his or her contacts in the market, offshore and onshore, to see how we implement it.”

In some cases the market is just too new. A large majority (85%) of offshore respondents say they can’t grow their businesses in the Panda bond market without further liberalisation. Almost half (46%) of onshore institutions feel the same way. The market has barely started, with issuances mainly by policy banks and multilateral institutions. However, the PBOC has announced plans to boost participation in the near future, and two foreign commercial banks—Bank of China (Hong Kong) and HSBC—issued panda bonds on the same day in September 2015. So far German carmaker Daimler has been the only pioneer among corporates, with issuances in March 2014 and April 2015.

Offshore RMB bonds bring a similar response. Some 70% of rest-of-the-world respondents say they are be reluctant to invest in growing their business in dim sum bonds without further clarification. A mere 13% say regulations are clear and have allowed them to grow. In China, just 20% say regulations are clear, while 36% say they need more clarification.

How do regulations in China on cross-border investment in the following areas affect your business? Selected assets(% respondents)

Figure 6a

0

20

40

60

80

100

85

46

1213

2326

20

1216 14

21 23

12

21

8

17

4

36

17

8

19

30

22

52

29

19

2828

15

2528

13

32

43

12

25

33

16

4036

13

38

28

18

27

50

18

3731

70

5

26

512

12

Source EIU survey

RMB debt onshore(e.g. Panda bonds)

RMB debt offshore(e.g. dim sum bonds)

RoW China RoW China RoW China RoW China RoW China RoW China RoW ChinaRMB equity onshore RMB equity offshore RMB alternative

investments (hedgefunds, structured

products etc) onshore

RMB alternativeinvestments offshore

Foreign exchange

We cannot grow our business until there isfurther liberalisation in this area

They are clear and have enabled us to grow our business

We would be reluctant to invest to grow our business until there isfurther clarification on practice and regulation in this areaWe would invest to grow our business only with complete liberalisation in this area

2 23 13 20 12 16 14 21 4 23 12 21 8 17

❛❛ It is difficult to stay up to date; it requires a good amount of time and effort. There are new regulations and texts published by the People’s Bank of China or the China Securities Regulatory Commission on a very regular basis. ❜❜Benjamin Lamberg, managing director & head of Asia debt markets, Crédit Agricole CIB



The hesitancy about RMB debt is doubtless coloured by recent market conditions. Foreign issuers long stayed out of the Panda market because raising funds offshore in the dim sum market was cheaper. More recently, the rally in A-shares in the first half of 2015 weakened the appeal of the dim sum market.

Market volatility at the time the survey was conducted probably influenced responses concerning onshore RMB equities, too. A majority (52%) of non-China respondents say they would be unwilling to grow their business in this area without complete liberalisation, suggesting that many international institutions are unwilling to commit until investment quotas are eradicated.

This response jibes with MSCI’s deferring its decision on whether to include China’s A shares in its emerging markets benchmark index. Though MSCI tried to put a positive spin on its deferral, it cited concerns over the pace of capital market reforms and investor worries about accessibility and capital mobility. Nevertheless, as Figure 3b above shows, global firms expect growth in business related to onshore equities in the near future, suggesting they agree with MSCI’s confidence that such issues will be resolved soon.

Regarding foreign exchange, a significant

proportion of both constituents in the survey (40% offshore; 38% onshore) say they are reluctant to invest in without the further clarification of regulations, a result that suggests the impact of reforms in offshore trading centres is being compromised due to lack of clarity.

Liquidity and other concernsCurrent market noise also plays into concerns over lack of liquidity offshore. A majority of global firms (51%) name lack of RMB liquidity as a problem, a reflection of the liquidity crunch in the major offshore trading centres during the August market collapse in China. In Hong Kong in particular, cracks showed in the regulatory mechanism to support RMB liquidity when, for a time, the seven-day offshore RMB interbank offered rate spiked to 10.95%. An offshore liquidity crunch emerged in Singapore, as well.

Janice Kan, general manager for Greater China at the Singapore Exchange (SGX), as well as head of market development and strategy for derivatives, believes that the liquidity squeeze in offshore markets was more a reflection of the lack of risk management options open to investors than a failure of liquidity measures established by regulators.

How do regulations in China on cross-border investment in the following areas affect your business? Selected business areas (% respondents)

Figure 6b

0

10

20

30

40

50

40

14

9

26

7

22

3

23

2

16

36

28

8

32

40

21

32

42

13

19

42

18

3633

9

31 31

18

48

33

5

36

Source EIU survey

Retail assetmanagement

RoW China RoW China RoW China RoW ChinaInstitutional asset

managementCash/treasurymanagement

M&A

They are clear and have enabled us to grow our businessWe cannot grow our business until there is further liberalisation in this areaWe would be reluctant to invest to grow our business until there isfurther clarification on practice and regulation in this areaWe would invest to grow our business only with complete liberalisation in this area

❛❛ There are currently not enough instruments and facilities to allow offshore investors’ risk management needs to be met. When there is market dislocation, there are limited tools they can turn to.❜❜Janice Kan, general manager for Greater China, SGX



“There are currently not enough instruments and facilities to allow offshore investors’ risk management needs to be met,” Ms Kan says. “When there is market dislocation, there are limited tools they can turn to.” She gives the example of the devaluation of the Japanese yen in recent years. “Nobody is complaining of a liquidity crunch, because the risk management tools are there.”

Global respondents are well aware of the risk management issue, with 47% listing lack of relevant risk-management products and services offshore as a problem. Ms Kan, who has introduced five RMB futures contracts at SGX, believes the pace of development can be quicker. The slow unwinding of regulatory restrictions covering derivatives onshore limits the ability to create more sophisticated risk management tools. Even publicised advances—such as a series of options trades executed by Deutsche Bank for Mengniu Dairy, a China-based food

supplier, immediately following the easing of a derivatives trading restrictions in August 2014—were a relatively small advance on “plain vanilla” options already available.4

The lack of able counterparties in all transactions, including derivatives, is also cited as a problem by more than one-third of China-headquartered institutions, a reflection of the familiar complaint that foreign companies lack experience with international RMB transactions, products or services. This reflects their home currency advantage, in the view of ICBC’s Ms Zeng. “Chinese firms have the financing, excess capacity and technology advantage, [which] complements local needs,” she says.

But there’s a flipside. Like a partner in a marital spat, many offshore respondents (39%) complain of poor communication with counterparties in this business, compared to just 21% in China.

4 http://www.allenovery.com/SiteCollectionDocuments/RMB%20report-case%20studies-email.pdf, P43



Legal reforms are seen as the biggest enabler of the RMB as a global investment currency, along with CIPS, while on- and offshore firms want less government intervention in China’s markets.

From the point of view of the financial institutions that will help drive global usage of the RMB as an investment currency, the obstacles to its adoption stand in plain sight. What policy measures and market developments do they think are most urgent to resolve them?

The need for legal clarity

The number-one policy reform global respondents think is likely to drive adoption of the RMB as an investment currency (and the second most important for those in China) is liberalisation of the legal services market and judicial reform. Separately, those in China see improved clarity over the legal infrastructure related to mainland securities as the most important market development—while for global respondents this is second (Figure 7).

The paramount importance of legal clarity and

Enabling adoption: Sought-after solutions4

Policy steps needed to accelerate global adoption of RMB as an investment currency (% respondents selecting in top three)

Figure 7a

0

5

10

15

20

25

30

35

18

35

27

28

32 3128

2527

23

2725 26

2826

24 2523 23 24

2225

22 21 2124

21

Source EIU survey

China

Rest of the World

Further liberalisation of

the legal services

market/judicial reform

Less government intervention in onshore equity

markets

Privatisation of the banking

sector

Removal of quotas for

cross-border investment

schemes

Accelerated pace of interest rate liberalisation

Lifting of restrictions on

foreign investment in

China’s financial services sector

Introduction of additional

onshore free trade zones

A free floating exchange rate

Allowing greater international

access to domestic

corporate bonds

Greater central bank

independence

Reforms to local government and

SOE financing

Relaxation of rules on

domestic bank lending overseas

28 3231 2825 2723 2725 2628 2624 2523 2324 2225 2221 2124 21

China

Rest of the World



certainty when it comes to opening China’s capital markets should be no surprise. Investors want to be sure their claims are recognised and their contracts enforceable. This became a point of contention after Hong Kong-Shanghai Stock Connect was launched in November 2014, given uncertainty over the ownership of securities held through a nominee. It was unclear whether Chinese law recognised the concept of beneficial ownership—in which a person enjoys the benefits of ownership even though the legal title is under another party’s name—or how disputes over such ownership might be enforced.

In the event the issue was resolved after the fact. Regulations established under the QFII and RQFII programmes allow for nominee holders of securities, language that was written into the Stock Connect regulations as well (in which the Hong Kong Securities Clearing Company is the nominee owner). The China Securities Regulatory Commission issued a clarification in May 2015 confirming the validity of the arrangement, and specialists in the area conclude that the rights of enforcement under Stock Connect are at least as robust as those under the QFII and RQFII schemes.

However, concerns are still evident. Attendees at an Economist conference on corporate governance in September 2015—all senior

executives from major multinationals—were polled on whether they felt confident they could pursue their legal claims on the mainland. Not a single attendee said yes.5

Anecdotal evidence suggests that the government’s response to the market chaos in the summer has added to confusion within the country, as well as internationally, about China’s commitment to strengthening the rule of law and making its application more transparent.

Jane Jiang, China regulatory partner in Beijing for law firm Allen & Overy, says that in the wake of the government’s response to this summer’s volatility, even local institutions started to feel uncomfortable with the uncertainty in the legal and regulatory environment and seemed to have lost their bearing.

“In the past, it was common to for foreign-based clients to seek clarification on regulatory uncertainty. Now concern has been equally intense from inside China.” Ms Jiang suggests that the government’s actions have pitched local players onto unfamiliar ground. Before this summer they felt confident in support garnered from long-term relationships with regulators and their familiarity with the rules of the game. Clarification was a

5 “Boardroom risk in a changing economic climate—Executive Summary”; The Economist Events, September 2nd 2015

Market developments needed to accelerate global adoption of RMB as an investment currency (% respondents selecting in top three)

Figure 7b

0

10

20

30

40

50

18

35

27

33

41 3935

25

35 3532

28 3026

29

22

27

33

2428

21

28

20

Source EIU survey

China

Rest of the World

Rollout of unifying technical standards

for international RMB transactions

Improved clarity of legal infrastructure related to mainland

securities

Improved research from credit rating

agencies of onshore debt

Inclusion of RMB in IMF Special

Drawing Rights reference currency

basket

Greater international

pricing of commodities in

RMB

Improvement of company

transparency in onshore financial

markets

More RMB swap lines

Inclusion of China A Shares in

emerging market indices (eg MSCI)

Wider distribution of international

RMB pools

More offshore RMB clearing centres

33 4139 3525 3535 3228 3026 2922 2733 2428 2128 20

China

Rest of the World



matter of turning to familiar contacts within the regulatory system. But the assurance bred from this familiarity is now in doubt, at least temporarily.

Beyond legal clarity, foreign institutions would see greater transparency in China’s murky corporate bond market as salutary, picking improved research from credit rating agencies of onshore debt as a top-three market development that would speed the RMB’s global use. China’s bond market is about the third-largest in the world, at about US$4.24trn. But without the guide of better research, the size and diversity of the market presents daunting obstacles, making it tough for investors to become familiar with the full range of bonds available to them, Goldman Sachs Asset Management noted in a recent report.6

Let the market workBoth offshore and onshore institutions are also looking for less meddling in markets. Financial institutions in China put “less government intervention in onshore equity markets” at the top of their list of policy reforms that would have the biggest impact, while for global respondents it is in second place—although not by a significant margin. In both cases it is above other laissez-faire policies often cited as reform priorities such as interest rate liberalisation and a free floating exchange rate.

To be sure, the noise of the stock market collapse at the time of the research plays into the response. The reaction signals concerns over the government’s response to the crisis: intervening directly by buying shares through state-owned companies to stabilise prices, pressuring short-sellers and clamping down on securities firms accused of market manipulation. The measures seemed to signal the state’s ambivalence toward allowing market forces to play a greater role—although officials have been at pains to point out since that there is no change to this policy.

From the international point of view, the need to let demand and supply dictate matters extends

6 http://www.goldmansachs.com/gsam/glm/insights/market-insights/china-bond-market/china-bond-market.pdf

to dissatisfaction with the quota system for cross-border investment schemes. MSCI’s deferral of its decision whether to include RMB-denominated shares in its benchmark indexes was partly due to this dissatisfaction. China has moved to expand access under the quota scheme incrementally, conscious of the implications of allowing the freer flow of capital across its borders. In the latest development, regulators expanded the UK’s RQFII quota in September, saying it did so based on market demand.

Institutional investors are aware that a phase-out of the system would have to handled gradually. “The quota system cannot be scrapped now, because of the pressure on capital flight is huge,” says Alberto Forcielli, the founder of Mandarin Capital Partners, a private equity fund, who is a notable China bear. “In theory it should be scrapped. [But] it may take many years, and we have no reason to believe it will be scrapped.”

Respondents in China are less concerned with ending quotas than with allowing the market to function within China’s financial services sector by lifting restrictions on foreign investment. This suggests recognition that new ideas and wider competition are needed to force reform among China’s indebted banks, as well as resolve issues in the “shadow banking” system.

Market participants in China are vocal in calling for reform. “We should put banking reform as a top priority,” says Huang Jianhui, Beijing-based dean of the research institution of China Minsheng Banking Corporation. “We should encourage Chinese banks to go global.” He also advocates a larger international role specifically for non-state-owned joint-stock institutions such as China Minsheng or China Merchants Bank, suggesting that private ownership would allow for speedier acceptance of reform and international practices than the cumbersome state giants. Foreign respondents to the survey agree, picking banking-sector privatisation as the joint-third-most-important reform priority.

❛❛ We should put banking reform as a top priority. We should encourage Chinese banks to go global.❜❜Huang Jianhui, dean, China Minsheng Banking Corporation Research Institute



Practicality and prestige

In general, respondents’ concerns largely reflect the importance of establishing mechanisms to allow the practical day-to-day usage of the currency. Speedier rollout of common technical standards is named as the most crucial market development by offshore respondents. China is only now preparing for a launch of the China International Payment System (CIPS), a messaging system that will allow the direct clearing of RMB transactions between counterparties across China’s borders (something currently possible only through a limited number of official clearing banks, in designated locations). The launch has been delayed several times; the PBOC confirmed that stage one was set to begin as this report went to press.

“This is one of the most important initiatives the PBOC has planned,” says Ms Kan of the SGX. “There is principal risk when one currency is exchanged against another and, to mitigate that, many currencies are settled through global solutions such as continuous linked settlement,” or CLS. She suggests that RMB “can also benefit from being part

of the CLS network, which is a mainstream solution already supported by a network of global banks.”

China respondents also give practical steps a high priority but have one eye on prestige, naming the RMB’s inclusion in the IMF Special Drawing Rights basket as a top-three market development that would speed the RMB’s progress. A decision on this—due at the time of writing—has been keenly awaited all year. Offshore respondents put this reform in the middle of the pack. It would have symbolic impact, but also a practical effect in increased RMB forex flows.

Darius Kowalcyzk, senior economist and strategist at Crédit Agricole CIB, notes that a decision to include RMB into the SDR basket with a 10% weighting (the current weightings for the Japanese yen and the British pound) means that central banks would have to add about US$500bn to meet reserve requirements. Given offshore and onshore RMB forex markets have daily trading volumes of around US$120bn and US$60bn, the influx would be easily absorbed—though would be “supportive” to the stability of the currency.



Financial services institutions claim investment in RMB competence is a high priority, but are they following through?

Statements made about the RMB’s rise often reveal a disparity. On the one hand it is headed for global investment status, perhaps even dominance over the US dollar. On the other, it lacks liquidity and available hedging instruments, and the regulatory underpinnings that support its growth are restrictive and unclear. That leaves players in RMB markets with a delicate strategic decision. Invest now, or wait? Approach gradually, or dive in?

Reluctant to commitMr Tang of ICBC Credit Suisse Asset Management, who worked as a commercial banker in the US before returning to China and joining ICBC, says global financial institutions pay lip service to the currency’s importance, but still treat it like a second-class currency.

“If you look across the board for all transaction banking infrastructure in RMB, investment has been minimal,” he says. “Banks will tell you that in the last ten years, ‘We’ve shifted our focus from interest to fee income and we’re building up our transaction banking operations, beefing up our teams in RMB.’ But what they’re doing is expanding

their sales teams, not the platforms, not the infrastructure. When was the last time they invested in a major upgrade of their transaction banking infrastructure?”

Banks argue otherwise, and will point to RMB competencies backed by the creation of new posts to oversee and consolidate all RMB transaction business. To take three examples, BNP Paribas has a head of RMB competency, HSBC has anointed a global head of RMB internationalisation, while Deutsche Bank has a global head of RMB services.

However, the survey responses do at least partly support the view that financial services businesses are reluctant to build RMB teams in the current environment. Only 38% of offshore respondents (versus 46% onshore) report having a research team that monitors RMB internationalisation and publishes reports and analysis. Only 34% offshore (45% onshore) report having a desk that specialises in structuring cross-border/international RMB risk management products. The China institutions show a thin majority in some areas, but in general are seem understaffed given the expectations for global growth, while none of the offshore players are in the majority for any of these crucial capabilities. For them, the majority view seems to be “wait and see”.

Preparing for a global RMB5



It’s still about the guanxiTo be sure, there is rarely a first mover advantage in banking. All the cost is up front. Even in the structuring of new derivatives products in China, bankers talk of a the long learning curve for those responsible for authorizing their use in state-owned companies, involving expensive bankers’ face time with senior management and visits to regulators to understand the boundaries of the endeavour.

This is the underlying reason that the rest-of-the-world respondents name improving connections or relationships with mainland regulators and authorities as the most urgent priority for financial services companies to increase international RMB business, picked by 41% (compared to 28% for onshore institutions; Figure 9).

Such is the power of the People’s Bank of China, caretaker of the growth and stability of the world’s second largest economy, with access to US$3.5trn in currency reserves, that an entire industry of research has bloomed to interpret the choices open to the central bank. This plays out in a practical level for financial services companies deciding how and where to grow their business. Mr Kowalcyzk of Crédit Agricole says that it would be distinct advantage for him to understand the PBOC’s tolerance for volatility in the RMB, for instance: without that knowledge it is difficult to know when to move up the value chain to more sophisticated RMB options, which could be a lucrative business for the bank.

Global companies also apparently look to onshore institutions to help grow in their cross-border RMB business, picked by 37% as an urgent priority. This reflects the view of offshore

Does your business have… (% respondents)

Figure 8

Source EIU survey

An in-house team trackingcross-border/international

RMB-related regulatorydevelopments

A specialist or specialists to liaise withclients to inform them on cross-border/international RMB developments

A compliance officer or bankerin contact with Chineseregulatory authorities to keepabreast of current regulatorydevelopments

A research team that monitorsRMB internationalisation andpublishes reports and analysis

Product development teamsthat focus on RMB productstailored to regulatory changes

A team that focuses on orspecialises in RMB clearing

services

A team dedicated toassessing client demand

for and knowledge ofinternational RMB

products and investmentservices

Officials/a team that meetswith regulators to explain/

educate regarding riskmanagement tools that can be

adopted for RMB, and toencourage further easing of

regulations

A desk that specialises in structuringcross-border/international RMB risk

management products

40

ChinaRest of the world

10

20

30

50

60

38

44

46

53

45

4944

41

53

47

38

44

38

42

3445

49

38



executives that their onshore colleagues are better placed to understand regulatory moves, and also that onshore institutions necessarily invest more in RMB business, because they live and breathe it.

An overseas opportunityAnother factor may be in play: with Chinese companies going overseas and major government initiatives such as “One Belt, One Road” (OBOR) in the early stages, partnering with major Chinese financial institutions that will be a major source of financing these drives could offer some access to the business associated with them. “We can see in the future of One Belt One Road that RMB dominated investment and settlement will become a key element,” says Ms Zeng of ICBC. Offshore institutions want a piece of that, too.

The priorities named by China institutions all reflect an urge to become more competitive in international markets. The most commonly selected move is marketing their global RMB competence outside China, showing an obvious desire to raise brand profiles. The response reflects an increasing focus on the “going out” strategy, in line with Chinese companies expanding overseas and government initiatives like the Asian Infrastructure Investment Bank and the Maritime Silk Road, as well as OBOR.

Perhaps most interesting, 30% of the onshore respondents say they see an urgent need to invest more in marketing their global RMB competence within China, grasping that they have the ability to take advantage of their position to capture companies expanding from China and at once become more competitive offshore. China institutions understand their own strength.

The front line of RMB innovationThe ability of financial services companies to innovate in RMB products and services will distinguish winners from losers as the RMB becomes a global investment currency. China and global firms award investment in RMB product development a relatively high priority.

Perhaps the front line of innovation lies in the offshore trading centres. The Singapore and London exchanges pay more than lip service in developing, and encouraging others to develop, new products in the currency.

Nikhil Rathi, director of international development of the London Stock Exchange Group, sees its position as “privileged.” “We are able to see RMB internationalisation taking place across asset classes, markets and customer types,” he says. The LSEG lists 35 RMB bonds on its markets, including the listing last year of the first RMB-

What financial services companies need to do most urgently to increase their international RMB business (% respondents selecting in top three)

Figure 9

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18

35

27

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2629 28 27

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Source EIU survey

China

Rest of the World

Improve their connections/

relationships with mainland

regulators/authorities

Improve their connections/

relationships with major Chinese banks

Reallocate resources towards

international RMB services

Focus on product development

Invest more in staff training on

international RMB products/ services

and markets

Create more channels for RMB

liquidity/access to liquidity for

international clients

Invest more in marketing their

global RMB competence outside

China

Apply for/secure quotas for

cross-border investment schemes as soon as they are

announced

Invest in communications

technology that is compatible with

cross-border standards

Invest more in marketing their

global RMB competence within

China

30 4128 3731 3429 3326 2928 2739 2725 2629 2630 21

China

Rest of the World



denominated green bond, issued by the International Finance Corporation. The group’s LCH.Clearnet, a global clearing system, is the first such institution to clear RMB-denominated exchange-traded funds in Europe and in 2012 it cleared the first CNY non-deliverable forward. Mr Rathi says that CNY is now the second largest currency pair, accounting for almost 25% of all cleared NDFs.

Arguably, the Singapore exchange has been more of a pioneer in building the offshore RMB ecosystem and liquidity. SGX and the Bank of China signed a memorandum of understanding in 2013 to invest to strengthen RMB infrastructure in both markets and include more RMB products and solutions. The Bank of China Singapore branch

became the first Chinese settlement bank for SGX’s derivatives market and a market maker for SGX’s RMB currency futures, which are now among the most-traded such instruments globally.

SGX remains vigilant on RMB innovation, but also looks at the state of play realistically. “Development of RMB internationalisation onshore is currently independent of offshore,” notes Ms Kan. “Both needs improved liquidity to support the growing demand for new products.”

This status quo is unlikely to change until financial institutions increase investment—something that the survey results suggest is unlikely without more regulatory clarity, making it a chicken-and-egg problem. A lucrative market, it seems, is still waiting in the wings.

What more-engaged institutions are doing to prepare for growth

Some financial services institutions are more prepared for growth in their cross-border RMB business than others. What does better preparation look like?

One way to find out is to compare those institutions that currently get more than 10% of their total revenues from international RMB-related business (45% of the survey respondents) with those that aren’t yet at this level. A significantly greater proportion of the “engaged” group are onshore respondents, and naturally so. In a hypothetical global market for RMB services, China firms will be more advanced, and their views are equally, if not more, instructive than those of their offshore counterparts.

Keeping clients closeA higher proportion of RMB leaders (47% vs 39%) says they deploy a specialist or specialists to liaise with clients to inform them about RMB developments. More than half (57%, compared to 47% of the rest) say they have a team dedicated to assessing RMB client demand for and knowledge of international RMB products and investment services. They are also more likely (47% vs 37%) to have a dedicated research team to monitor RMB internationalisation.

Focused on functionalityEngaged RMB institutions place a higher emphasis on operations and systems. They are more likely (49% vs 38%) to have a team that focuses on or specialises in RMB clearing services. They are also more likely to stress the importance of investing in communications technology that is

compatible with cross-border standards to increase their RMB business. Fewer (28% vs 36%) are concerned over lack of internal experience in dealing with international RMB transactions.

Taking responsibilityRMB leaders also seem more likely to act upon the criticism lodged by Mr Tang of ICBC Credit Suisse Asset Management that “Instead of talking about promoting [the RMB], they should do more to build the basics outside of China: basic infrastructure, basic products and basic services.”

Substantially more of the engaged RMB institutions (63% vs 42%) agree that changes to the investment climate outside of China’s control will dictate the adopt of the RMB as a global investment currency. It’s everyone’s business, not just China’s.

Ready for lift-off



Acceleration of the RMB’s rise will intensify as competition for global competency in the currency builds

Confidence in the RMB is not the same as commitment. Market growth requires participants to create new products and services, hammer out technical codes, and risk capital to invest in new systems and competencies. But the RMB’s move toward investment currency status is hobbled by uncertainty and indecision on the part of the main players responsible for such developments.

Part of this reflects the timing of the research, during the dramatic fall of China markets this summer and the RMB’s devaluation, which has injected a note of caution into the responses. Majorities of both offshore (51%) and onshore (52%) firms put investments on hold owing to the volatility. The participants closest to the turmoil and with the most at stake—i.e. China institutions—are more keenly sensitive to recent political and economic developments. A majority in China (56%, compared to 49% offshore) think that slowing economic growth will make the government more cautious about lifting capital controls. Marginally more also think that this summer’s display of market intervention has made the government more cautious (63% versus 56%).

The responses may reflect not so much pessimism as an appropriate grasp of the problems that the RMB faces on its global rise, and the risks China and its financial institutions face in rushing

this opening of its capital markets. Indeed, 62% agree that they have to improve their ability to compete on a global basis before capital controls will be eased (versus 47% of the rest of the world who think this).

China’s responsibility?One of the more interesting divisions revealed by this research suggests different views of responsibility for the currency’s global rise. A majority in China (58%) agree that changes to the global investment climate outside the country’s control will dictate the adoption of the RMB as a global investment currency. Only 44% of rest-of-the-world respondents agree. In other words, those in China think the internationalisation of the currency will be dictated by global events, while a majority offshore—doubtless with one eye on the regulators—think it is up to China.

Despite this view, it is easy to predict that as Chinese institutions grow and compete due to government drives to extend economic power overseas, the rest of the world will respond to the competitive pressure constructively, becoming more willing to bear risks to support greater use of the currency. Part of the responsibility rests solidly on the shoulders of the international community, including a willingness to invest more in the products and services needed. A shift of emphasis will emerge, in which RMB internationalisation is taken for granted as a collaboration of self-interest.

Conclusion: Towards a common currency



In this environment, what will the “prepared” organisation look like? More-engaged institutions today are more likely to provide in-house resources and devote teams to assessing client demand and build client knowledge. They’re more likely to have teams devoted to the basics of RMB clearing, and they are less likely to sit on their hands waiting for the authorities to open the market before coming up with innovative products and services. Overall,

this group is more likely to accept risk as the price of success in an expanding RMB market, devoting more investment to people, marketing and systems.

This kind of engagement has driven the adoption of global denominations before, as the rise of sterling and the US dollar demonstrated. When it happens with the RMB, a new era of global investment currencies will be underway.



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A Delicate Stage: The Future of the RMB as a Global Investment Currency

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Transcript of A Delicate Stage: The Future of the RMB as a Global Investment Currency