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Friday, January 30, 2015, 10:30

Demand for yuan picks up pace

By ALFRED ROMANN and Kristine Yang in Hong Kong
Demand for yuan picks up pace
Head of the China Securities Regulatory Commission, Xiao Gang (second left) and Shanghai’s Mayor Han Zheng beat a gong at the opening ceremony for Shanghai-Hong Kong Stock Connect on Nov 17. The investment program helps to boost yuan deposits in Hong Kong and is seen as a driver of the currency’s internationalization. (AFP)
The differences in the value of the onshore (CNY) and offshore yuan (CNH) are vanishing as the internationalization of the yuan picks up speed and the currency becomes more widely available in and out of China.

The CNH once traded at a premium to the CNY, which allowed for a number of arbitrage opportunities. But the ongoing push to internationalize and liberalize the currency is helping to eliminate the differences.

The gap narrowed through the last year as the CNH became more widely available and a number of programs allowed for the easier flow of CNY out of China.

As of Jan 27, the CNY was trading at 6.244 to the US dollar while the CNH was trading at 6.249, virtually on par. A year ago, the CNY was trading at 6.05 while the CNH was trading at 6.03, showing a much wider difference.

Demand for the CNH dropped through part of last year, but picked up speed again ahead of the launch in November of the Shanghai-Hong Kong Stock Connect program, which allows investors in Hong Kong to buy stocks in the Chinese mainland.

Demand was also driven by the elimination that same month of a 20,000-yuan conversion limit that had been in place since 2004.

“The offshore renminbi (RMB) market in Hong Kong has already developed with reasonable depth and breadth,” says a spokesperson from the Hong Kong Monetary Authority (HKMA). “As for RMB deposit rates set by banks, they would depend on a host of factors, including the business considerations of individual banks.”

Step by careful step, the yuan is becoming an international currency even as its value against the dollar stabilizes.

The yuan is now the seventh most traded currency in the world as the number of offshore yuan centers, where CNH business is done, is growing rapidly.

“The RMB internationalization is a new era for global trade, finance and investment,” said HKMA chief executive Norman Chan during the Asian Financial Forum in Hong Kong recently.

The push to expand the use of the yuan in global markets picked up speed through 2014, thanks to a series of steps that ranged from the appointment of new offshore yuan centers to the granting of more quotas to institutions to buy and invest in the yuan, as well as the launch of new investment programs that open new avenues for the currency’s internationalization.

The use of the currency in cross-border trade transactions and settlements has expanded significantly. As much as 20 percent of China’s external trade was settled in yuan in 2014 along with 31 percent of China’s incoming foreign direct investment and 16 percent of the country’s outward direct investment.

Another driver of the currency’s internationalization is access to investment products.

The Shanghai-Hong Kong Stock Connect program helped boost yuan deposits in Hong Kong and triggered a spike in yuan-denominated deposits in the city.

Hong Kong remains the largest offshore yuan center in the world and is home to the largest amount of the currency outside the Chinese mainland, with a liquidity pool worth 1.16 trillion yuan ($185.6 billion) in 2014. It is also the most active yuan trade settlement hub with 6.2 trillion yuan settled in the special administrative region in 2014, compared with 3.84 trillion the previous year.

Hong Kong is also the largest offshore yuan bond market with 196 billion yuan bond issuance in 2014, compared with 117 billion yuan in 2013.

Another example is the ongoing expansion of the Renminbi Qualified Foreign Institutional Investors (RQFII) program, through which countries can access and invest in yuan assets in the Chinese mainland.

Last week, China and Switzerland reached an agreement that would give the Swiss access to 50 billion yuan to invest through the program. The deal made Zurich the fifth city in Europe to join the RQFII and raised the possibility that it will become another offshore yuan center.

“RQFII is still the most convenient way to invest in China,” says Ding Chen, CEO of CSOP Asset Management and chairperson of the Chinese Asset Management Association of Hong Kong. “In only two years (since the RQFII was established), we can see more than 30 funds in Hong Kong.”

For fund managers, the RQFII opens a number of possibilities. While the Stock Connect program is limited to only some stakes in listed securities, RQFII allows fund managers to invest in stock markets or in the fixed income markets.

But along with greater convertibility come greater risks for the currency. Up until 2013, the yuan was generally considered a one-way bet. Investors expected the currency to appreciate steadily against the US dollar. And it did exactly that for most of nine years, since it was first allowed to gain in value against the dollar in 2005.

The value of the yuan against the dollar dropped for about six months in mid-2012 when the People’s Bank of China widened the trading band against which the value of the currency was fixed.

The yuan dropped again last year against the dollar, ending 2014 at 6.25 yuan to the dollar compared to 6.05 yuan at the beginning of the year. The drop marked a change to the long-standing trajectory of gaining value. In 2009, the yuan was trading at 6.8 to the dollar.

In January, Standard Chartered Bank said it expected the yuan to gain just 1.4 percent against the dollar this year, down from an earlier forecast of 3.7 percent appreciation. HSBC is even more bearish, expecting the yuan to actually drop 0.2 percent against the dollar.

“The authorities are likely to … resist new gains given subdued regional trade dynamics,” said the bank in a note. It expects the appreciation to resume in the second half of this year.

But even if its value drops slightly, the push to raise the profile of the yuan in international trade and finance is likely to remain unabated and that should help further eliminate the differences between the CNH and the CNY.

Another link between Shenzhen and Hong Kong, along the same lines as Shanghai-Hong Kong Stock Connect, is on the agenda. The Hong Kong-China Mutual Recognition of Funds program is on the way and will allow for mutual recognition of investment funds between the Chinese mainland and a foreign market.

Meanwhile, more CNH centers are in the pipeline. On Jan 6, Bangkok became the newest offshore yuan center and the first in 2015. Negotiations are under way to create new CNH centers in Kuala Lumpur, Nairobi and San Francisco.

Kent Troutman, a research analyst at the Peterson Institute for International Economics in Washington DC, said in a note: “Although the opening of these offshore centers is unlikely to result in a material shift in the RMB’s global position into a reserve currency that challenges the US dollar, it will increase the global exposure to the RMB.”

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