The rising importance of China's currency in terms of investment and trade is inevitable, but how it will take place is less certain, said panellists during AsianInvestor's Southeast Asia Institutional Investment Forum in Kuala Lumpur yesterday.
For one, Ryan He, executive director at the Center for Strategy in Financial Crisis, believes the speed of RMB liberalisation will be quicker than expected.
He points to the weight of expectation from investors and the fact that there have been “lots of hints and clues” emanating from Chinese authorities that they are keen to accelerate the pace of RMB market opening.
For example, China's vice-president has said recently that Chinese investors should be more active in global markets, something that would be aided by making the currency more easily convertible.
“China policy in this sector will be more aggressive and more flexible, which will be very good for investors, especially in Hong Kong,” says He. The RMB bond market will continue to grow quickly, albeit from a small base, he adds.
The growing amount of RMB flows was reinforced by Adam Wilson, director for securities markets at financial messaging provider Swift.
He says the firm has seen an 11% increase in the use of RMB cross-border trades, noting that such activity is driving RMB deposits, which in turn is driving investment in RMB products. He didn't, however, specify the timeframe for this rise.
Wilson also points to 77% year-on-year growth of RMB deposits in Hong Kong as of June, of which 71% are held by corporates.
In addition, there has been 33% month-on-month growth in the use of RMB payments, the bulk of which is happening in Hong Kong, but increasingly also in other markets. Wilson adds that over 900 financial institutions in more than 70 countries are doing RMB-denominated business today.
This trend will not be without its hiccups, however. Swift has seen a sharp fall in the volume of trade messaging in recent months, which he suggests is a leading indicator that “we are heading for troubled waters”, says Wilson.
On the question of a potential alternative reserve currency to the US dollar, the RMB is the obvious choice other than the euro, notes Min Tha Gyaw, director of operations at Shanghai-based consultancy Z-Ben Advisors. It is not a very convertible alternative, but an alternative nonetheless, he says.
Whether the renminbi becomes a reserve currency is not so straightforward, says Min. Ultimately, China wants to make sure RMB liberalisation doesn't affect its growth trajectory, he notes, which makes it a balancing act.
Inbound investment into China is another area where authorities are keeping a tight rein. Still, the level will be steadily permitted to rise via the qualified foreign institutional investment (QFII) scheme, says Min. More Asian firms are applying for QFII licences, he adds, and quotas will continue to be granted at a steady pace of around $2.5 billion to $3 billion a year.
As for outbound Chinese investment flows, He expects to see delegations from China visiting Europe with a view to buying European assets, such as infrastructure and state-owned assets.