Presentation on theme: "OUTLOOK FOR THE Renminbi by Marshall Gittler Head Of Global FX Strategy 31.1.2013."— Presentation transcript:
OUTLOOK FOR THE Renminbi by Marshall Gittler Head Of Global FX Strategy
The official name of the Chinese currency is the renminbi ( 人民幣, “People’s Currency”). Its symbol is RMB. The unit of the RMB is the yuan ( 元 or 圓 ). One yuan is divided into 100 jiao ( 角 ) –Yuan is the same word as the Japanese yen and Korean won. –It means round or circle. Its symbol is ¥¥ China has capital controls, so a yuan that’s outside the country isn’t the same as one inside the country. The official abbreviation for ones inside the country is CNY (= Chinese yuan), while the ones that are outside the country are CNH (for Hong Kong). First, some terminology
China is trying gradually to internationalize the renminbi 3 steps in internationalization: –China and its major trading partners transact in RMB –Widespread third-party usage of the RMB in financial and trade transactions –Central banks maintain sizable holdings of RMB as reserves There is no historical precedent for what they are doing What they are trying to do
China is following the same pattern with the RMB that they did with liberalising the economy First tried out liberalising the economy in “special economic zones” They have a two-track strategy: –RMB trade settlement –Developing offshore RMB markets Eventually, they hope to make the RMB on par with the dollar as an international reserve currency How they are trying to do it
Milestones so far 2003: HK residents allowed to open CNH deposit 2005: Panda bonds (RMB bonds issued in China by non-residents) 2007: Dim sum bonds (RMB bonds issued in Hong Kong) begin 2009: Cross-border trade settlement in CHY begins 2009: Bilateral currency swap agreements with other CBs instituted 2011: HK brokerage firms allowed to sell RMB-denominated ETFs that directly invest in mainland stock and bond markets 2011: Outward foreign direct investment allowed in RMB Countries that reportedly hold RMB bonds as part of their FX reserves include: Japan, South Korea, Malaysia, Indonesia, Nigeria, Chile and Saudi Arabia
The #14 currency for payments Source: Society for Worldwide Interbank Financial Telecommunication (SWIFT) Went from #20 to #14 currency for payments in just one year!
HK markets After explosive early growth, volumes stalled in 2012 RMB deposits in HK have fallen, dim sum bond issuance has dropped as yields rose Source: Bloomberg Finance L.P.
Has internationalisation stalled? Source: Bloomberg Finance L.P. The globalisation of the RMB first stalled back in Oct. 2011, when the market started forecasting the depreciation of the RMB. Globalisation based on expectations of currency appreciation is fragile.
Over long term as well Source: IMF World Economic Outlook
China forecast to have a rising c/a surplus Source: IMF World Economic Outlook If investors are no longer eager to hold RMB to benefit from expected appreciation, then it would help globalisation if the country ran a current account deficit, which would mean it is exporting money. However, it is still running a c/a surplus and this surplus is expected to rise sharply in coming years.
They now have both current and capital account surpluses Source: Bloomberg Finance L.P. In fact it’s running both a current and capital account surplus, meaning little if any net RMB are flowing out of the country at all!
In order to get more RMB out of the country, they have to liberalize the capital account so that domestic investors can shift their assets out of the country. The drive to internationalise the RMB is really a drive to liberalise the capital account –Officials in China are likely to agree that it’s good to have a currency that matches China’s place in the world economy –People who want to liberalise the capital account can use that as a starting point that everyone agrees with and work from there Problems they face
A lot of people in China (reasonably) worry that liberalising the c/a could lead to financial instability –Volatile capital flows could lead to inflation, deflation, crises –Rich Chinese could move money abroad, drain funds from banks –Domestic IR would have to be liberalized, raising the cost of capital –Exchange rate would have to be freed as well –Banks would have to be put on a commercial footing and freed to allocate capital according to credit risk –State-owned enterprises (SOEs) lose preferential access to capital –Government would lose some levers for controlling the economy Problems they face
The main impediment to opening the financial markets is the govt’s desire to maintain direct control over the economy. –This has been their developmental model up to now, and it’s worked The current system requires that depositors must remain captives of the domestic financial system. –If there were higher-paying alternatives to the banking system, money would flow out of the banks and the government would no longer be able to use state-controlled banks to direct investment Hence lifting capital controls and floating the exchange rate would require the fundamental restructuring of China’s economic model Problems they face
Real deposit rates are negative Source: Bloomberg Finance L.P. How long would money remain in the banks with negative real yields? A liberalised current account would force the government to raise bank deposit rates, which would raise funding costs for companies.
Authorities believe they can maintain domestic financial as long as they restrict the return of offshore RMB back onshore But the success of the whole project depends on how much freedom overseas residents have to choose RMB assets –The globalisation plan depends on overseas investors wanting to increase their holdings of RMB assets. Problems they face
China’s capital markets are among the most closed % of market owned by overseas investors, EquityBonds China (ex overseas listed securities)0.8% China (inc overseas listed securities)8.3%1.5% US13%17% UK47%39% Japan21%4% Germany51%45% Brazil27%9% Russia14%18% India20%3% Mexico28%12% Vietnam8%3% Source: Deutsche Bank
China’s debt markets are about the size of Britain’s. Not small, but not comparable to the size of China’s economy. GBP accounts for 16% of global FX market turnover, 4% of global FX reserves. JPY accounts for 22% of FX turnover, also 4% of reserves. Debt markets still small Source: E. Pradad and L. Ye, “Will The Renminbi Rule?”, Finance & Development Magazine, March 2012
Financial deepening: loans vs bonds Source: Bloomberg Finance L.P. Government bonds outstanding were much greater than bank loans even before the explosion in govt debt following the financial crisis In China however the government bond market is much smaller than the loan market, as the government prefers to direct finance through the state-owned banking system.
Chinese banks look like US banks… Bank of ChinaBank of America Market cap$134.2bn$120.3bn Employees288,687267, earnings$53.6bn$94.4bn Source: Bloomberg Finance L.P.
…but there are big differences Bank of ChinaBank of America 2012 daily stock mkt turnover $11mn$1.7bn 2012 turnover as % of total shares 3%458% Free float as a % of total shares 3.16%99.95% # of institutional shareholders 561,790 Top shareholdersCentral Huijin Investment 96.6%Blackrock4.8% China Life0.31%Vanguard4.2% Sino Life0.06%State St4.0% Source: Bloomberg Finance L.P.
Use of JPY in reserves has fallen as Japan’s GDP shrank relative to US Same thing was happening with European currencies until EUR started; then financial deepening increased use of EUR This shows the importance of deep financial markets in determining which currencies become widely held reserve currencies Reserve holdings increase with financial deepening Source: IMF
Lifting capital controls and floating the exchange rate would require: –facing down tough political opposition & vested interests –willingness to expose the country to new and unknown stresses and external volatilities –Implementing one of the largest set of economic and financial reforms in recent history Even if you think all these things are worth pursuing, is now a good time to pursue them? The question facing China is not about the desirability of RMB internationalisation. It is about the nation’s priorities in reforming its financial and economic institutions. Problems they face
“What is needed is a roadmap with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account… If all that happens, there is no reason why the renminbi will not reach the status of a reserve currency occupying a position on par with China’s economic status.” Christine Lagarde, IMF Managing Director 18 March 2012, Beijing What is likely to happen?
Gradual liberalisation is likely to continue, but at a slow pace Full liberalisation likely many years away, if ever RMB likely to grow in presence, but not dominate –Could become like Japanese yen – 3% of reserves Many years before it’s a major reserve currency Not a threat to the dollar’s position What is likely to happen?
Onshore companies borrowing RMB from HK and remitting the money back (already begun) RMB-denominated commodity futures (gold, copper) to be listed in Hong Kong, London –HKEx completed takeover of LME in December RMB settlement of USD-denominated commodity trades on the Chicago Merc, LME Issuance of RMB-denominated stocks in Hong Kong Future liberalisation steps
London is trying to position itself as a centre for offshore RMB trading It’s crucial to achieve 24-hour CNH trading Btu clearing CNH depends on the RMB RTGS system in HK, where several UK banks already participate Not included in UK settlement system and not likely to be added either as it’s not convertible London’s position
Some brokers offer CNH on their platforms –Liquidity is a question; rates aren’t constantly updated The IMM offers deliverable CNH futures in standard ($100k) and e-micro ($10k) size – Options will be available later …but why play CNH when what you want is to play the Chinese economy? If you want to play…
AUD is much more volatile Source: Bloomberg Finance L.P.
Headline goes here Source: Bloomberg Finance L.P. AUD follows Chinese indicators
AUD follows Chinese indicators more closely than Australian ones Source: Bloomberg Finance L.P.
and more closely than CNH does Source: Bloomberg Finance L.P. And more closely than CNY does
RMB has been liberalised somewhat and liberalisation will continue gradually, but it will be a long time if ever before the RMB is a fully convertible and free floating The government retains control over the FX rate within a set band. Its volatility is low and the rate does not always reflect economic conditions RMB trade is relatively illiquid. Pricing updates are infrequent and spreads are wide If you want to trade the Chinese economy, look at trading AUD/USD or AUD/JPY In short
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