Renminbi Investment to Accelerate, Says Former AsPac Banker

The Renminbi market will accelerate significantly in the coming years, with increasing liberalization of the investment laws for the currency, according to industry expert Philippe Metoudi.

Metoudi, formerly with Cearstream until July of last year, Metoudi says the Renminbi has become a popular currency since the Chinese regulator first announced the RQFI scheme several years ago and is now set to really take off. In addition, he says, financial institutions in China are becoming more tolerant of risk and volatility and are asking more questions about repo, securities lending and collateral management. Metoudi broke from what he describes on his LinkedIn profile as family time and intensive mandarin classes, to speak to Global Custodians about the changes in the market.

What developments have you observed in China since entering the securities services industry?

PM: When I first joined Cedel (now Clearstream) in 1992 our customers were buying German Bunds, Gilts etc. and what I have witnessed over the last 20 years is more intra-Asian Trades and we had to ensure at Clearstream we implemented domestic links for Asian markets for our customers in Hong Kong who wanted to buy some Indonesian rupee papers. There was a massive interest to invest in JGBs (Japanese government bonds) because it was for a largest economy in Asia and Clearstream implemented the JGB link, which became very successful very quickly. Now, the name of the game is Chinese Renminbi for the next few years and at Clearstream we knew there was a demand but everybody underestimated the potential of these market.

How long before the Renminbi market really takes off?

PM: It’s just a matter of time. At my last Sibos in 2011 in Toronto and I was moderating a session on Chinese Renminbi and it was on a Thursday afternoon, which was supposed to be a quite day, but the room was packed. I think any major player with no exposure to China will miss a great opportunity. I still believe it is a great currency. I have seen battles between different financial centers about who is going to be the securities center, who is going to be the forex center, who is going to be the fund center and the next battle is which financial center is going to be the clearing center for Renminbi. Obviously Hong Kong is going to be a massive advantage. I have lived there for 25 years and I can tell you when I first moved to Hong Kong it was a very British colony and today it is a Chinese city. You can now drive to China provided you have a Chinese license plate. Back in the old days getting from Hong Kong to China was a hassle and if you had Taiwanese stamps in your passport they used to hassle you. Now Hong Kong is becoming fully part of China and has a really massive advantage over the other financial centers. Singapore is trying very hard to catch up and I think it’s going to be challenging for them. Interestingly enough, Taiwan is really trying to get back in the game as well. Today one of the big successes of Hong Kong was to bring Taiwanese investors via China into Hong Kong. So basically you could not get a seat between Taipei and Hong Kong because all of these guys had to travel via Hong Kong to China. Today you have over 500 flights a week between Taiwan and the mainland. My experience in 25 years in Hong Kong is that sometimes things take time but when they do happen they happen very quickly. Where you could only access China via Hong Kong suddenly you had so many flights between Taiwan and China. China has recently issued some laws further liberalizing Renminbi. Again if you ask me where the action will be for the next few years I have no doubt its going to be the Chinese Renminbi.

I have been following what the Chinese central Bank bas been doing for the last 25 years I can tell you they are not wrong very often so whatever they do they do it for a reason and clearly I think the goal of China is to make this currency very international. Now it does not mean that that overnight the Chinese Renminbi is going to be fully convertible and fully transferable but definitely things are going to happen there.

What specific securities services will benefit from this liberalization?

PM: Chinese banks and market infrastructure providers have a thirst of learning what is happening overseas and many mainland Chinese bankers visit ICSDs, CSDs and global custodians’ head offices abroad to really understand what can be done and what cannot be done. One of the things Chinese banks are really trying to understand is volatility. They like predictability but it is only a matter of time before everything offered in the west will be offered in China, including repo, securities lending and collateral management. Hong Kong is a very interesting situation because the individual investor in Hong Kong is allowed to hold 20,000 Renminbi or $3000 per day. The holdings of Chinese Renminbi in the Hong Kong banking system is increasing by the day and the trend will continue. Back in the old days we were just holding cash. Now for many reasons the banks don’t like to have cash because it puts pressure on the balance sheet. As a result there was a move to issue short and medium term papers. Today a lot of investors are tapping this market and they want to ensure that billions and billions of Renminbi in Hong Kong are invested. Foreign banks are also interested in issuing this paper. Supernational organizations are going to be more active in the future in issuing euro denominated bonds in Chinese Renminbi. It’s difficult to say whether its going to happen in 2-3 years but the trend is to ensure the market is going to be credible as any other in the world.

How is the market infrastructure evolving to meet the liberalization?

PM: There are two CSDs in China – SDNC for equities and CDC for fixed income. Every ICSD and global custodian wants full access to the China but there are restrictions. However it is only a matter of time before these restrictions are lifted. There is also talk of a pan-Asia CSD. The Chinese are well placed for this with their currency.