The offshore CNH model could be adopted in the US within the next decade although on a far bigger scale as befitting China’s largest trading partner, says Citi Private Bank’s chief investment strategist, John Woods.
As a precursor to full RMB convertibility, the CNH model will likely continue for up to 20 years, Woods notes, and therefore “is relevant for those countries with extremely strong trading relationships with China”.
“I would not be at all surprised if over the next five to 10 years the CNH variant is adopted and employed at some point in the US, where RMB will be used in trade settlement with China,” he suggests.
“To the extent the CNH is seen as a test case for further CNY internationalisation, its success in Hong Kong suggests similar offshore platforms could be extended to other parts of the world. What better place than the US?”
Woods says the number of US corporates lining up to invest in China during President Hu Jintao’s visit to Washington underscores the importance of an offshore vehicle to fund expansion.
As such he foresees that an offshore RMB market in the US would become far larger than Hong Kong's in the next five to 10 years.
According to statistics published this week by the Hong Kong Monetary Authority (HKMA), RMB deposits in Hong Kong rose 12.6% month-on-month to stand at Rmb314.9 billion at the end of 2010.
Meanwhile, total remittance of RMB for cross-border trade settlement climbed to RMB100.9 billion at the end of December, from Rmb93.7 billion the previous month.
Institutions and individuals are eager to park offshore RMB deposits in investment products, mainly dim sum bonds (CNH-denominated bonds issued in Hong Kong), of which the present market size is about Rmb65 billion.
“The demand for CNH investment products is very obvious in Hong Kong at the moment because the CNH yield is higher than USD yield,” notes Woods. “But it is hard to tell how attractive RMB will still be in five-to-10 years when the CNH model is adopted elsewhere given it is a long time-frame.
“China has embarked on a multi-year journey toward currency liberalisation. And in our mind, it is almost inconceivable that it could be put back.”
Further, Woods believes that letting "the RMB genie out of its bottle” will only increase demand for the currency.
He likens the CNH model to the euro-yen bond market developed by Japan in 1980s, when authorities allowed the offshore issuance of yen-denominated bonds to encourage foreign investors to fund Japan’s corporate growth, with the result that a euro-yen market grew from effectively zero in 1983 to $23 billion by 1987.
“To the extent the euro-yen market transformed Japan into an international financial centre – thereby funding the vast off-shoring of Japan Inc during the 1980s and 1990s – the Japanese experience holds a number of relevant, even critical, upsides for China,” he states.