GC Friday Interview: Virginie O'Shea, Senior Analyst, Aite Group, on the Renminbi's Internationalization

Aite Group's new report on the renminbi finds that currency has become increasingly internationalized, particularly as offshore hubs have grown in Hong Kong, Singapore and Europe. Certain political and operational challenges act as barriers to the currency becoming truly global, but as a whole, interest has been on the rise and looks to continue. Virginie O'Shea, senior analyst in Institutional Securities & Investments at Aite Group explains where the currency and the general Chinese investment landscape is at.
By Jake Safane(2147484770)
Aite Group’s new report on the renminbi finds that currency has become increasingly internationalized, particularly as offshore hubs have grown in Hong Kong, Singapore and Europe. Certain political and operational challenges act as barriers to the currency becoming truly global, but as a whole, interest has been on the rise and looks to continue. Virginie O’Shea, senior analyst in Institutional Securities & Investments at Aite Group explains where the currency and the general Chinese investment landscape is at.

GC: What has caused the overall growth of the renminbi?

VO: If you look at it from the trade finance angle, there’s a lot of pressure for multinationals that are operating in China to begin using the renminbi, because I guess the cost of changing from one currency to another, and primarily it’s going into U.S. dollars, is actually quite high, and it adds a little bit more complexity, putting the FX risk on top of it. So there’s certainly been pressure, as the Chinese corporates that have been interacting with external parties are keen to discount the use of settling in renminbi.

If you look at within the investment space, looking at it from a capital markets angle, there’s certainly interest in renminbi because of the appreciation for a while. Until this year, there’s been a gradual appreciation of the currency. In about February, the currency depreciated somewhat, but overall, the trend has been for the currency to appreciate. Some of the reasons for that are the government controls around the currency and the restricted use of it outside the boundaries of China, and some firms are very keen to get a foothold in that region, and a bit of that market are investing in things like dim sum bonds offshore, trying to stake a claim in China. It’s a relatively limited scheme at the moment, and there’s lots of different new foreign investment schemes coming out on the basis of QDII or RQFI, and there are multiple versions of that. So very gradually China’s lifting [restrictions]. Some of the schemes are easier to interact with and less administratively burdensome than others; the newer ones tend to be easier to [work with]. And we’ve got the Shanghai Free Trade Zone set up and that’s generating interest, but it’s very early days.

GC: Why have offshore renminbi centers been on the rise?

VO: The reason it’s gone to offshore centers is largely because there’s such limited foreign direct investment opportunities in China. Aside from some of the schemes, you’re pretty much limited. So the idea of having offshore clearinghouses is that you can settle in renminbi outside the borders of China, because at the moment their payments infrastructure is undergoing a revamp; it’s not necessarily the easiest to find a Chinese broker onshore. And also if you look at the European hubs, I think that’s because it will make it a lot easier for trade corridors initially. So if you look at Frankfurt, there’s a lot of trade ties with China, and London is the hub for FX activity, so certainly that would make it easier for that type of business, hence the ongoing [activity] within local European markets, giving them access to markets in China.

GC: Where else have renminbi hubs been set up?

VO: There’s plenty of them. I think the most activity to this date has been going on in Hong Kong and Singapore. They’ve been the biggest hubs so far, and I expect that to continue for some time. I think where Europe comes in is it’s a centralized point where North American markets and Latin American markets can get access to China as well. [Europe is] ideally situated with regards to time zones, and that’s where we have a role to play, and there’s a lot of interest with Chinese banks setting up operations in financial center hubs in Europe too. This also garners interest in the other direction. [Chinese investors] also want to invest in markets [in Europe]. It’s a dual wave corridor for clearing, trade finance, [etc.]

GC: If the onshore markets were liberalized, what would happen as a result?

VO: At the moment the renminbi is not fully fungible when its onshore versus offshore, so there are two different interest rates for it. The onshore renminbi is being set by the government, while the offshore is a floating rate set by the market. So until they’re fully fungible there will be an opportunity for offshore markets. Once that [fungibility] happens, there is less of a barrier to direct investment in China. But that’s also predicated on them having the requisite infrastructure to support the investment, and it’s also predicated on the Shanghai Free Trade Zone actually coming off as successful…so there’s a number of variables…Obviously you don’t have much offshore hubs for dollar clearing, so why would you have massive offshore hubs for renminbi clearing in the distant future? It’s likely to move largely onshore.

GC: Did you find anything surprising in the report regarding market participants views on the renminbi’s internationalization?

VO: It’s not necessarily surprising, but I think a lot of the operational issues are quite significant. What’s surprising is there’s still a lack of understanding of the markets overall, and a lot of the firms are saying the biggest hurdles are educationally-based, so their investors are not understanding how to interact with Chinese markets, being slightly weary of them. And also I think there’s this idea that just by holding a renminbi bond it will continue to appreciate and then you’ll make money on it, which is very peculiar, but that seems to be a pervasive reason why there’s a secondary market for these dim sum bonds.

Also, a lot of the investors in China are very keen to get outside the borders of China in regards to investment. So there’s a lot of uptake in schemes that go the other direction, like the QDII for example. And gradually it will be extended beyond institutions to individuals, and that will be even more important given the rising depth of wealth in the country, and retail investors in the country are very active, so that will be a third at least of the flows there. If you look at [the global impact], I think the wealth of some of the Chinese investors is going to be quite significant in the future.

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