Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Caroline Owen – Chief Executive of RMB Global Advisors, a New York-based global advisory, and special advisor to The Working Group on U.S. RMB Trading & Clearing – is the 134th in “The Trans-Pacific View Insight Series.”
After proceeding in fits and starts, the internationalization of China’s currency, the renminbi (RMB), seems to be resurgent. What’s your outlook?
2018 is set to be a milestone year for RMB internationalization. With the PBOC’s [People’s Bank of China] recent notice on further improving cross-border RMB business, the upcoming inclusion of China A-shares in the MSCI indices, and Bloomberg’s recent announcement that it will add Chinese RMB-denominated government and policy bank securities to the Bloomberg Barclays Global Aggregate Index, cross-border use of the currency should flourish. Already we are seeing increased interest from U.S. corporates to use RMB as an invoicing currency with their Chinese counterparts. This coupled with the emergence of cross-border RMB remittances at the retail level should lead to an increase in the use of RMB for global payments, which better reflects the size of China’s economy. At the same time, offshore investors are poised to mobilize billions of RMB in the offshore market for investment in China’s capital markets, creating new opportunities for China to unleash further outbound RMB initiatives.
Explain the correlation between the Belt and Road Initiative (BRI) and RMB internationalization.
China’s Belt and Road Initiative serves as an important platform for internationalizing the RMB, boosting its use both as a trade and financing currency. Much like the BRI, RMB internationalization is about proactively fostering globalization. Modernizing the trading routes along the Belt and Road should not only increase RMB cross-border trade with these countries, but also further promote the currency in the offshore market. Not only will Chinese companies be able to use their RMB balance sheets to fund projects along the Belt and Road, but they will increase RMB liquidity in those countries thereby enabling further RMB business. While the BRI is about connecting the Asian, European, and African continents, opportunities for Chinese investment extend to other parts of the world, including the Americas, offering additional avenues for RMB use. Together, the BRI and RMB internationalization initiatives are bound to have a significant impact on the world.
What is the impact of Chinese President Xi Jinping’s removal of the two-term presidency on the dim sum bond market?
President Xi’s continued leadership will play a pivotal role in the further evolution of the dim sum bond market. As more Chinese companies seek funding to support policy initiatives, such as the BRI, having access to an array of investors will be critical. While much of the focus for investors and borrowers alike has been on the opening of the onshore capital markets, the dim sum bond market will continue to play a unique role. For example, further relaxations in regulations enabling Chinese corporates to use dim sum bond proceeds in China will attract more borrowers to the offshore market. This alone will give Chinese enterprises more flexibility and potentially cost savings when selecting their issuance market. Likewise, changes in foreign debt quotas for foreign companies in China may lead to more foreign multinational corporation bond issuance by offshore parents.
Explain the significance of including Chinese securities in global benchmarks.
While the sheer size of China’s capital markets makes them impossible to ignore, China’s continued efforts to open up the markets makes them almost impossible to exclude from global benchmarks. While much has been debated about the pace and direction of RMB internationalization, China is going to play a more permanent role in international portfolios. The inclusion of Chinese securities in the most widely used equity and bond benchmarks should also lead to a consistent and sizable inflow of investment to China, giving Chinese regulators the ability to open the gates on outbound flows. As the appeal of China’s onshore capital markets grows with global investors, maintaining sufficient liquidity in the offshore RMB market will be critical. Should further outbound flows remain limited, China can support the offshore market through a combination of offshore liquidity facilities, swap lines, and its domestic repo market.
How is RMB business evolving in the United States?
Unlike in other RMB hubs, RMB business in the U.S. is developing in a unique way. First, the Working Group on U.S. RMB Trading and Clearing was created by market participants for market participants, not policymakers. Second, the U.S. is the first market to feature two officially appointed RMB clearing banks – Bank of China’s New York branch and JP Morgan – each offering distinct capabilities to meet the demands of the domestic market. Their combination of strengths is particularly important in a market the size of the U.S. where truly domestic enterprises are bound by time zones and frequently lack on-the-ground support in Asia to help them transact in RMB. Having two RMB clearing banks in the U.S. to support an array of market participants, both at the institutional and retail levels, will likely accelerate the adoption of and create efficiencies in the use of RMB.
