Cross-border Renminbi Business Faces Market Adjustment

来源: CHINA FOREX 2017 Issue 1 作者:Wang Li

Cross-border renminbi settlements fell nearly 20% in 2016 compared to a year earlier,according to data from the People's Bank of China. The declining use of the renminbi came amid volatility in the Chinese currency as well as in interest rates at home and abroad. The decline also came as the renminbi was formally added to the International Monetary Fund's Special Drawing Rights,a reserve currency basket.

Does this signal a weaker appetite for holding the Chinese currency? The Bank of China's "White Paper on the Internationalization of the Renminbi" noted that despite the decline there were areas of progress over the year. The survey,which covered 3,477 domestic and foreign enterprises in more than 40 countries,was one of the largest and most extensive examinations of the subject so far. How should we interpret the results and what can be done to expand cross-border renminbi business? To answer these questions,China Forex interviewed Li Mang,general manager of the trade and finance department at Bank of China. Li stated that the survey revealed that cross-border use of the renminbi remained limited,despite the progress in some areas over the year. In the new and challenging environment,commercial banks should seize the international business opportunities brought about by the internationalization of the renminbi and expand their market through business innovation,he said.

China Forex: What would you say are the key findings of the latest survey of domestic and foreign enterprises on renminbi internationalization?

Li Mang: We can see from this survey that there were differences in the development of the internationalization of the renminbi last year. We can see that there was volatility domestically and on the global market. But we also can see that domestically and internationally the outlook towards the currency remained favorable.

The changes last year were as follows. First,despite the domestic and international market turmoil,domestic and foreign players still hold a positive view of the potential for renminbi internationalization. It can be said that in the past year we saw some differences in the environment regarding the global role of the currency. On one hand,the renminbi was officially included in the International Monetary Fund's Special Drawing Rights (SDR) currency basket. That has helped consolidate the status of the renminbi as a major global payment currency. The renminbi is the most actively traded currency from an emerging market country. On the other hand,the domestic and international economic and financial situation has become more complex. There have been a number of global "black swan" events,and there has been a considerable amount of volatility in the renminbi exchange rate as well as interest rates on the domestic and foreign markets. These factors had an impact on the progress of the internationalization of the renminbi. However,the long-term trend remains positive. In the survey,72% of the domestic and foreign enterprises had a positive view of the international status of the renminbi. In October last year,the renminbi officially joined the SDR currency basket. About 93% of the domestic enterprises surveyed and 96% of the foreign enterprises said they believed this would enhance the status of the renminbi in the future.

Second - and less positively - the cross-border use of the renminbi remained limited.. The survey showed that about 77% of the overseas companies included in the survey said they would convert their renminbi income into US dollars or other local currencies,indicating that the internationalization of renminbi was still in the initial stage.

Nonetheless,there were some areas of progress. In recent years,the establishment of free trade areas (FTAs) has helped push corporate demand for renminbi products and services. The results showed that demand from companies in the FTAs was focused on renminbi global cash management,renminbi bonds and cross-border loans. The FTAs are the laboratory for the future use of these renminbi channels. The "One Belt,One Road" initiative and the internationalization of the renminbi showed positive interaction. The survey revealed that 74% of the enterprises along the regions covered in the "One Belt,One Road" program had more convenient access to renminbi products and services,a significant improvement over the previous year. In addition,the "Fortune 500" companies have become a more active customer base for cross-border renminbi services. For example,a higher percentage of these companies held renminbi assets,invested in renminbi bonds,or purchased renminbi equity products than the sample average in the survey.

Third,the internationalization of the renminbi is the result of market promotion,and policy support is indispensable. The cross-border renminbi business had to be started from scratch,and the scale has grown over time. This has brought convenience and opportunities for domestic and foreign enterprises thanks to critical policy support. The survey showed that 41% of domestic respondents wanted to see more kinds of policies regarding the internationalization of the renminbi. Some 55% of the domestic enterprises surveyed said they believe that the policy would help their business. In addition,companies want to further open up the domestic and foreign markets,and more than 50% of the foreign enterprises in the survey wanted to enter the domestic financial market. About 45% of the domestic enterprises surveyed said they wanted to participate in the offshore renminbi market.

China Forex: What kind of innovation might we see from banks in order to provide better financial services related to cross-border use of the renminbi?

Li Mang: In this new market environment,commercial banks need to seize new business opportunities presented by the internationalization of renminbi. They need to actively pursue business innovation to expand into new segments of the international market and find new customer groups.

First,they need to develop capital account and financial market businesses. The future convertibility of the renminbi on the capital account and the two-way opening of financial markets will provide more opportunities for internationalizing the renminbi. For example,in recent years,there has been a policy of "full access macro-prudential management" of cross-border services. This has brought about a market liberalization that lets foreign institutional investors invest in the interbank bond market as well as new policies regarding renminbi cross-border use in free trade areas. These have created new market opportunities in cross-border financing,investment,settlement,cash management,and personal finance among other areas. There is still a great deal of room for banks to develop new businesses.

Second,there is a need to vigorously develop the new markets along the "One Belt,One Road "corridor. There is also a need for stepped up financial support for domestic companies that go out into the global market. This will boost the renminbi's role in trade and investment and contribute to the use of the renminbi in areas covered by this policy initiative on trade and investment.

Third,banks must grasp the opportunity provided by the renminbi's inclusion in the SDR basket to attract new customers and promote even closer cooperation with foreign central banks,international financial organizations,sovereign wealth funds as well as stock and commodity exchanges. This means they need to look to provide quality financial services for trading renminbi financial products as well as in renminbi bond underwriting,renminbi treasury management,commodities priced in renminbi and other business areas in the global market.

China Forex: The inclusion of the renminbi in the SDR was a key event in the global financial market and this was addressed in the "White Paper." What effect do you think the addition of the renminbi to the SDR will have on the internationalization of the currency in the future?

Li Mang: I think the renminbi's inclusion in the SDR will promote the use of the renminbi in global financial transactions and help improve the international monetary system. It will also spur more countries to include the renminbi in their foreign exchange reserves. In turn,this will be beneficial to the convertibility of the renminbi on the capital account and it will accelerate China's financial reforms and the opening up of the nation's economy. Specifically,I think the effects will be as follows:

First,this will expand the use of the renminbi by domestic and foreign market players. The renminbi's inclusion in the SDR has supported market confidence in the currency. The "White Paper" survey confirms this,with about 93% of domestic respondents and 96% of overseas respondents saying that the renminbi's official inclusion in the SDR will help raise the international standing of the renminbi. A total of 64% of domestic respondents and 52% of overseas respondents said they believed this would enhance cross-border use of the renminbi.

Second,this will gradually promote the use of the renminbi as an international reserve currency. The renminbi's official inclusion in the SDR basket does not mean that the Chinese currency will be quickly adopted as a reserve currency by every central bank. However,the currencies that now account for the four biggest shares of global reserves are all in the SDR basket. Additionally,the yield on renminbi bonds is relatively high,and this is a key attraction. The continuing improvement in domestic market supervision coupled with the gradual reduction of thresholds for market access will also increase interest in Chinese bonds from foreign investors. I think that foreign sovereign institutions are still eager to hold renminbi assets.

Third,there is a need for the enhancing the renminbi as a pricing mechanism. Since the beginning of the internationalization process in July 2009,the campaign has made progress,but the renminbi has not really become a currency for pricing international transactions. This shows that China's foreign traders mainly price their transactions in US dollars and make renminbi payment and settlement. International commodity trading is still mainly denominated and settled in dollars. Renminbi-denominated financial instruments are also scarce. But I believe that the renminbi's inclusion in the SDR is conducive to the promotion of the renminbi's pricing function. The survey showed that 18% of domestic respondents said that even when the renminbi exchange rate fluctuated,enterprises could still fully adhere to renminbi pricing. This proportion has risen for three consecutive years,indicating that renminbi pricing for international transactions is becoming more frequent.

Since 2016,expectations of an increase in US interest rates have had an impact on global liquidity and this has created uncertainty in the market. In this survey,about 78% of the overseas respondents said that if liquidity in US dollars or other major currencies tightens significantly,they would consider using renminbi as an alternative. Among the national enterprises along the "One Belt,One Road" corridor,more than 87% of the respondents said they would consider using the renminbi as an international liquidity supplement.

All of these new trends will provide new business opportunities for commercial banks. It is expected that there will be more demand for renminbi investment products in the future. Commercial banks could see new business as agents acting on behalf of overseas central banks and other institutions making investments in the domestic market. Business areas with good potential include account trusteeship,investment transactions and capital settlement,among others. The renminbi's inclusion in the SDR also should help promote the use of renminbi by enterprises and individuals in cross-border trade and investment. Renminbi-denominated settlements and trade financing will also enjoy more growth.

China Forex: The "White Paper” has examined the use of the renminbi by enterprises in countries that are closely related to the “One Belt,One Road" initiative. How do you see the banks responding to this initiative as well as the “go out “policy for domestic enterprises?

Li Mang: The "One Belt,One Road" initiative and the internationalization of the renminbi are mutually reinforcing. The internationalization of the renminbi creates convenience for the initiative and will promote cross-border use and circulation of the renminbi. Therefore,we are particularly interested in the views on the use of the renminbi by enterprises in this development area.

The 2015 survey indicated that companies in the areas covered by the "One Belt,One Road" initiative seemed to be more satisfied with the renminbi,with more than 80% of them saying they intended to make greater use of the Chinese currency. That was nearly 10 percentage points higher than the overall level among overseas companies. However,most companies reported that using renminbi-related financial services was not very convenient. The "One Belt,One Road" initiative has not been fully exploited to promote the internationalization of the renminbi. In the 2016 survey,the results improved,with 74% of the enterprises in the "One Belt,One Road" saying they now have easier access to renminbi products and services,a significant improvement over the previous year. This suggests that the infrastructure and trade initiative and the internationalization of renminbi have produced results.

As for the Bank of China,our work will entail three aspects. First,Bank of China needs to continue to improve its institutional architecture,building a global network. At present,Bank of China has set up operations in 20 countries along the "One Belt,One Road" corridor,and in the future it will also cater to need of the enterprises "going global." It will put China's key trading partners in each region at the top of the agenda.,offering renminbi financial services for enterprises. Second,it needs to continue to support cross-border trade and investment,focusing on supporting exports of high- technology products. It will also use hedging and other products and services as well as risk management tools to help domestic and foreign companies hedge against renminbi transaction risks. In addition,the bank needs to provide services that support the use of the renminbi as an international reserve currency. In particular,since the renminbi has been officially included in the SDR basket by the IMF,many national governments and enterprises along the "One Belt,One Road" will become more interested in the use of the renminbi. Therefore,the banks should also actively develop emerging investment products for overseas central banks and other sovereign institutions.

China Forex: Data released by People's Bank of China showed that in 2016 the national cross-border renminbi settlement volume suffered a nearly 20% decline. Was this due to the exchange rate fluctuations?

Li Mang: In 2016,due to the combined effects of a number of factors,the renminbi exchange rate and domestic and external interest rates fluctuated to a significant extent and cross-border use of the renminbi suffered a decline. However,I think this is a normal part of market development. At present,the renminbi's domestic market exchange rate remains basically stable against a basket of currencies. In the long run,the renminbi exchange rate will be more in line with market rules and will remain at a reasonable and stable level. That should contribute to the development of the renminbi's internationalization.

From the point of view of commercial banks,I believe that the two-way volatility of the exchange rate will affect the willingness of domestic and foreign customers to use renminbi in transactions for a period of time. However,this will also bring other business opportunities. For example,when the renminbi depreciates,borrowing in the currency will become more attractive. This will help lending in renminbi and trade financing business under the "One Belt,One Road" initiative.

Exchange rate fluctuations also create more demand for professional services related to currency value preservation and capital appreciation for enterprises,individuals and institutional investors. That will provide opportunities for the banks.

The "White Paper" survey showed that,on one hand,companies are constantly adapting to exchange rate fluctuations. More than 50% of the overseas respondents to the survey and 80% of the domestic enterprises were more concerned about the renminbi's exchange rate against a basket of currencies than against a single currency. Some 67% of the overseas companies actually increased the proportion of renminbi used in cross-border transactions,and that was a recent year record. On the other hand,companies are beginning to take the initiative to use renminbi financial products to manage exchange rate fluctuations. This brings business opportunities to commercial banks in the area of spot and forward transactions as well as swaps,options and other derivatives. This helps provide financial service support to customers,meeting their need to preserve asset value and hedge against risks.