A radical shake-up in the mix of offshore RMB asset issuers is tipped to take place as Beijing encourages foreign firms to raise funds via the CNH market to invest directly into China or to facilitate trade settlement.
Such a change to the landscape, which hitherto has been dominated by Chinese entities, would assist policymakers in their fight to keep inflation in check, says Chi Lo, chief executive of HFT Investment Management.
He presented his views to an audience of asset owners, fund managers and service providers at AsianInvestor’s sixth annual investment summit at The Conrad hotel in Hong Kong last week.
Lo noted that Chinese firms raising and then remitting offshore RMB assets were simply pouring liquidity into the onshore banking system, boosting money supply and therefore adding to domestic inflationary pressures.
Such asset creation hinders Beijing in its battle to beat back inflation, which is sure to remain a top priority for the next two years as the nation strives to wean its economy off exports in favour of domestic consumption.
However, offshore RMB assets raised by foreign firms and invested into China directly or used to facilitate trade settlement carry no such concerns for Beijing.
Lo, therefore, believes there will be “a big change in the mix of RMB asset issuers from what we saw last year, when almost three quarters of RMB bond issuers were Chinese entities”.
That said, he suspects that internationalisation of the renminbi will be a measured process which happens more slowly than many people might expect.
He points out it is not in the world’s best interests if the advance of the renminbi on the international stage happens too quickly and leads to a collapse in US dollar demand. If the market for US Treasuries were to crash, for example, the whole world, most notably China with his huge foreign exchange reserves, would feel the aftershock.
From a risk perspective, Beijing would also be reluctant to advance the RMB internationalisation process too quickly, adds Lo.
“When you internationalise any currency there needs to be an offshore currency centre, which to some extent is like a shadow banking system,” says Lo.
“But these offshore banks are not subject to onshore regulations. Therefore if the Chinese regulator doesn’t know what kind of potential risks will be transmitted back [onshore] from the offshore banks, the offshore RMB centre will not grow as large and as quickly as many people expect.”
Liberalisation of the RMB bond market started last year and there are now 24 international banks that can trade in the onshore interbank bond market.
Shanghai is experimenting with the qualified foreign limited partners (QFLP) programme in the private equity investment arena, while offshore asset managers have been anticipating the mini-QFII scheme.
Lo points out that all these measures demonstrate the caution of Beijing policymakers as “they intend to attract RMB back to China rather than encourage RMB to stay offshore”.
On the topic of how to achieve true currency liberalisation, Lo observes that while there has been strong transactional demand for RMB as an international trade currency, demand for RMB outside of trade settlement is still purely speculative, with surging RMB deposits in Hong Kong simply being used as a bet on currency appreciation.
“The RMB deposits [in Hong Kong] have come at the expense of a fall in other foreign currency deposits,” he adds. “In aggregate, we are not seeing people abandon the Hong Kong dollar and going to RMB, but rather reshuffling their foreign currency portfolio.”
Lo suggests that this points to the need for China to accommodate certain market demands: for central banks to build RMB reserves; for the private sector to build RMB savings; and for the investment community to have more investment vehicles for their RMB assets.