Realising the Chinese dream – The RMB as a vehicle for future growth

Much has been written about China’s economic slowdown in the past year. And while it is widely accepted that the nation’s leadership has deliberately cooled its burgeoning economy in favour of long-term growth, some commentators maintain that China’s economic advancement has stalled.
What is sometimes overlooked, however, is the sheer size and scale of the nation’s economy and the breadth of opportunities it presents to foreign companies. Indeed, even with lowered growth forecasts, China’s outlook dwarfs almost all other markets worldwide.
“China is trying to shift from breakneck growth to a more sustainable model in a way that no other country has tried to do before,” explains Stuart Gulliver, HSBC Group Chief Executive. “That it is trying to do so whilst undertaking a comprehensive programme of financial reform only makes that task harder. As it is, Beijing has managed a gradual deceleration from double-digit growth in a measured and controlled way.”
According to Gulliver, China has steadily opened up its economy to outside investors, and has let market forces steer change. While the nation faces significant challenges within this process, the Group Chief Executive believes China has the ability to overcome present-day hindrances. “If anything, we think that 7% is more a growth floor than a target, and signs indicate that Beijing is preparing to cushion China’s transition through further easing,” adds Gulliver.


RMB’s role
Playing a central role in the nation’s economic development is China’s currency, the RMB. To date, it has predominantly been used to settle international trade, accounting for 22% of China’s total trade in 2014[i]. From near-zero usage in 2010, the RMB has become the world’s number-two trade finance currency[ii] and is among the top-five payment currencies globally[iii].
According to HSBC’s RMB Internationalisation Survey 2015, which examines the views of international companies that currently do business with China, RMB usage for cross-border settlements amongst Singapore-based companies remained at the same level as last year, at 15% of total trades. Of the 100 Singapore-based companies surveyed, around 41% are expecting to increase their cross-border trade with China in the following 12 months. Of the non-users, the survey found that 32% of Singapore businesses are planning to start using the currency in the future. The principal drivers behind today’s usage include reduced foreign exchange risk; access to cheaper trade pricing; and an anticipated increase in trade with China.


“The implication is that businesses are trading in RMB because it offers a number of practical benefits rather than for short-term speculation,” says Joseph Arena, Head of Global Trade and Receivables Finance, HSBC Singapore. “We expect that the continued liberalisation of the currency will help spur awareness and greater usage among corporates globally,” he added.


Cross-border liquidity management
Early-2014 saw HSBC China roll out its cross-border RMB cash pooling programme in the Shanghai Free Trade Zone (SFTZ). Subject to some restrictions[iv], the facility was a first for China, enabling domestic and foreign businesses to recoup RMB from the offshore market back to the mainland, as well as centralise treasury and cash management operations globally – tasks that were previously unavailable, preventing foreign businesses from repatriating their Chinese earnings overseas.
“Companies doing business in the zone now have access to a number of pilot schemes,” says Rohit Joshi, Head of Global Payments and Cash Management, HSBC Singapore. “These include two-way cross-border sweeping, which allows onshore entities to directly inject cash into offshore affiliates, and vice-versa; intra-group netting, where companies can conduct multiple RMB-denominated cross-border transfers performed as a single transaction; and access to cross-border RMB loans, where locally registered businesses can obtain additional liquidity from offshore centres.”
China’s cross-border initiatives are supported by several offshore clearing hubs, which are located across Europe, North America, Middle East and Asia Pacific, including Singapore. Furthermore, China’s State Council recently announced plans to develop an additional three free trade zones in Fujian, Guangdong and Tianjin[v].


Payments infrastructure
A notable development in the liberalisation of cross-border RMB flows is the China International Payments System (CIPS). To be rolled out in late-2015, CIPS is designed to speed up RMB-denominated international payments from the offshore market, as well as reduce transaction risks and increase cost efficiencies.
 Currently, cross-border RMB payments are cleared through mainland-based correspondent banks or via clearing banks located in offshore hubs. The introduction of CIPS, however, will allow overseas businesses to clear RMB transactions with China-based counterparts directly.
“The introduction of CIPS will speed up the payments process for Singaporean companies that trade with China in RMB, rather than using a nominated clearing bank to execute such transactions. Businesses will soon be able to pay Chinese suppliers directly using their own bank accounts,” explains Rohit.


Investment instruments and reforms
As an investment currency, however, the RMB is less developed. The majority of advancements in this space have focused on foreign players investing in China, rather than Chinese investors looking overseas. Current RMB-denominated initiatives available to investors include the various qualified investor “Q” schemes – namely the Qualified Foreign Institutional Investor, Qualified Domestic Institutional Investor and RMB Qualified Foreign Institutional Investor programmes – as well as the Shanghai-Hong Kong Stock Connect initiative, all of which act as testing tools to monitor the performance of cross-border capital flows.
Significant reforms to China’s capital account are nonetheless expected in the near-future, which will encourage equally weighted two-way flows. Schemes likely to be rolled out include a new stock connect between the Shenzhen and Hong Kong exchanges; international access to mainland corporate bonds through the Shanghai Free Trade Zone; expansion and merger of the qualified investor schemes; and completion of China’s interest rate liberalisation programme, with the lifting of its deposit rate ceiling. Furthermore, China’s State Council recently launched a deposit insurance scheme for business and consumer savers.


HSBC predicts full convertibility of the RMB to take place by 2017[vi], allowing the RMB to be granted reserve currency status by the International Monetary Fund (IMF). Given China’s commitment to further open its capital account in 2015, however, the RMB will likely become a reserve this year. At present, some countries already hold the RMB for this purpose including several Asian and African central banks.


Global integration
While there is some way to go for China’s currency to be fully integrated with the global financial system, its breakneck development – coupled with the nation’s wider reform agenda – will ensure greater harmonisation of the RMB with the world’s foremost economies. In order for China to realise its full potential, however, the nation will also need the support of all actors, whether the private sector, financial institutions or state governments. “China cannot do it alone. Global and central banks, national governments and international institutions all have a part to play by inviting China to play a fuller role in the global economy. If they do so successfully, we will all benefit,” concludes Gulliver.