How treasurers can capture rising RMB opportunities

Li Haiying, Managing Director, Renminbi Business at Bank of China (Hong Kong) Limited (BOCHK), discusses the latest trends in the RMB market and offers insights on how corporates can leverage opportunities arising from the internationalisation of the currency.

1. What are the key changes and highlights of the offshore RMB market?

The main business indicators of the offshore RMB market have rebounded recently. In Hong Kong, RMB deposits have grown to Rmb842 billion by September 2021, while Hong Kong’s RMB real-time gross settlement (RTGS) total turnover has increased around 25% between January and October last year. SWIFT data shows that Hong Kong continues to be the largest RMB clearing centre, facilitating 75% of RMB clearing business globally.

There is also wider market acceptance of RMB products, as RMB’s market share as an international reserve currency has risen to a record high of 2.61% by end September 2021, according to International Monetary Fund (IMF).

Offshore investors are showing strong demand for RMB assets. By the end of October, bonds in China’s interbank market held by overseas institutions totaled Rmb3.85 trillion. On 29 October 2021, FTSE Russell officially included Chinese Government bonds in the FTSE World Government Bond Index. IFA data also shows that, as of October 2021, more than 50% of the emerging market capital inflow ended up in the China market.

The average yield to maturity of offshore RMB bonds now exceeds 3%, which is an attractive level given today’s easing policy environment.

2. What are the main factors driving these changes?

As China’s financial market continues to open up, the Chinese government launched a slew of policies to support RMB internationalisation and expand the offshore RMB market on multiple dimensions.

For example, there are now 21 free trade zones across China after the first zone was established in Shanghai in 2013. In early 2021, six Government departments made a joint announcement on further optimising cross-border usage of RMB. The Southbound Bond Connect and The Cross-boundary Wealth Management Connect Scheme in the Greater Bay Area (GBA) launched this year also bode well for the offshore RMB market.

Another important factor is the flexibility and resilience of RMB, as reflected in its exchange rate. After a consistent one-way appreciation in the past several years, it now maintains two-way fluctuations while remaining relatively stable when comparing to other currencies.

The financial infrastructure for RMB settlement is also improving continuously, which further facilitates the usage of RMB. The RMB-based Cross-Border Interbank Payment System (CIPS) launched in 2015 has now grown to include 160 countries.

3. How can corporates leverage the increasing internationalisation of the RMB?

For corporates that aim to earn higher investment yields, they can consider RMB-denominated investment channels and products to enrich their portfolio, including bonds, structured investments, commodities, credit and equity derivatives.

If corporates are keen to save more RMB, one way is to settle trades in RMB with other Chinese companies. More Chinese corporates have expanded their business operations into the global market, so it is more common and convenient to use RMB in the global trade cycle.

In terms of risk management, treasury products ranging from currency options and cross-currency swaps, to bespoke hedging and funding solutions, can help corporates hedge their foreign exchange risk when multiple currencies are used in their working capital cycle.

4. What is a corporate treasury centre? How can it help corporates capture RMB opportunities?

A corporate treasury centre (CTC) can help corporates capitalise on the currency. A CTC is effectively an in-house bank within a multinational corporation, focusing on centralising control and usage of global funds for their group of companies. Its main functions include intragroup borrowing and lending, cash-and-liquidity management, centralised payments to suppliers, supporting the raising of capital, risk management and financial advisory for the whole group. CTCs are usually set up in international financial hubs with free flow of capital and mature financial infrastructure like Hong Kong.

CTCs can help corporates ride the RMB wave. Firstly, a CTC gives a global view of all cash positions and centralises control of global funds so better decisions can be made. It can then respond to local cash surplus and deficit by reallocating funds and making value-added investments. When new policies and offshore RMB products are rolled out, a CTC can also perform immediate assessments from a global perspective.

Secondly, the execution of RMB settlement and RMB investment becomes easier as a CTC centralises treasury activities and funds concentrated in most overseas locations. Some CTCs make and collect payments on behalf of their group of companies with their trading counterparties, and so can execute RMB settlement directly within this function. In terms of investment products, a CTC is in a better position to negotiate prices with banks and other financial institutions since it has a large sum of funds on hand.

Thirdly, a CTC can use RMB in its key responsibility area of risk management. The centre manages risks for its group companies, including liquidity risks, country risks, interest rate risks, foreign exchange risks, etc. RMB-related treasury products with a risk management function can be managed by the CTC on behalf of the group entities.

5. What is the future for the offshore RMB market?

BOCHK is a firm believer in the offshore RMB market, through which overseas investors can invest in China's financial market. Offshore RMB bonds have great potential. While China’s domestic bond market is the world’s second largest, foreign holdings only take up 2.4%, which is considerably lower than the average level of 20% in the developed countries, or 10% in the developing countries.

When looking at the investor side, overseas financial institutions and corporate issuers account for more than 30% of Hong Kong's offshore RMB bond issuance. In the future, the Southbound Bond Connect scheme is expected to guide domestic investors to allocate more to offshore RMB bonds and attract more corporates to issue more RMB-denominated bonds in Hong Kong.

More enterprises are expanding their footprints globally while using the RMB currency. RMB and RMB related assets have become one of the business developments focuses nowadays. BOCHK looks forward to enhancing partnerships with corporate clients via its integrated RMB products and services.