While it is not yet time for celebrating for those who want to see a free-floating, Chinese currency market with minimal restrictions on capital flows, there are definite signs of development. Two things caught my eye recently. One was an announcement by Singapore’s Central Bank that it had agreed a currency swap with China – a necessary trade enabler between the two countries, making it much easier for Chinese and Singaporean businesses to settle with each other. The second was a speech by Norman T. L. Chan, Chief Executive of the Hong Kong Monetary Authority, (Hong Kong’s central bank) about financial innovation in China.
Chan’s speech marked the launching of the Asian Development Bank’s first issue of a renminbi bond in Hong Kong. Renminbi bonds had, prior to this issue, been available for durations ranging from two to five years. The Asian Development Bank’s issue was the first ten year bond and marks the start of the development of a proper yield curve in renminbi bonds.
Chan celebrated both this fact and the fact that the Chinese authorities are now prepared to extend the universe of renminbi bond issuers to include Triple-A rated international financial institutions like the ADB.
Current developments go back to June of this year, when companies in 20 provinces and cities in mainland China were given the option of settling their current account transactions with any counterparty anywhere in the world in renminbi, through Hong Kong banks if they wished. As a result banks in Hong Kong saw settlement trade figures in renminbi leap from a total of 4.5 billion renminbi for the whole of the first half of 2010, to over 38 billion renminbi for the month of August alone.
This is, of course, just a sliver of the total trade volume between China and the rest of the world, so the potential for rapid and tremendous growth in renminbi denominated settlements is huge. Chan points out that this in turn will help to build up a liquidity pool to support remnimbi financial intermediation domiciled in Hong Kong, through bank lending and bond issuance.
This is hugely important since despite its world power status as a trading nation, China’s bond market is still strangled by regulation and remains the weakest in Asia. The development of a strong bond market in China will have huge implications for the region as a whole, particularly for the Asian derivatives market, which for the first time ever, did more trades than the US derivatives market in the first half of 2010. It is also very important for the developing Chinese insurance market, since insurers have a huge appetite for long dated bonds to match against their long dated risks.
It is also worth pointing out that there is a very strong correlation, according to the Bank for International Settlements (BIS), between a strong, sophisticated government bond market and a world class derivatives market – so far the Asian derivatives market is being led by Hong Kong and Singapore, with Japan playing catch up, and China trailing.
Chan points out that already the pool of renminbi deposits in Hong Kong has more than doubled, from 60 billion at the end of 2009 to 130 billion by the end of August 2010. Non-Chinese companies engaged in the real economy in China want to make use of Hong Kong’s multi currency capabilities to raise funds demoninated in renminbi for their China operations.
Moreover, in July the People’s Bank of China lifted restrictions on intrabank transfers in renminbi between Hong Kong and China. This has opened the way to a burgeoning renminbi denominated wealth management industry based in Hong Kong. It’s not exactly open house yet for the rest of the world, but it is a good start and the response from the investor community has been phenomenal, Chan says. One to watch….
Further reading on the Chinese economy and global currency flows:
- China and the Global Financial Crisis, by Linda Yueh
- Rebalancing the global economy – nice if you can do it…, blog post by Anthony Harrington
- Economic Ebb and Flow, a World of Challenges and Opportunities by Hamish McRae
Tags: Asian Development Bank , central banks , China , derivatives , Hong Kong , Hong Kong Monetary Authority , Norman T. L. Chan , People's Bank of China , Renminbi , Renminbi bonds , Singapore