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TCB CC QuickNote- Returning Home-The Formation of the Asian RMB and Capital Market Zone 2011 Dec 20

TCB CC QuickNote- Returning Home-The Formation of the Asian RMB and Capital Market Zone 2011 Dec 20

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Published by: Orion Constellation on Apr 11, 2012
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04/11/2012

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China Center
 For Economics and Business
China QuickNote
 Returning Home
 — 
 the conception of the Asian RMB and capital  market zone
By Ken DeWoskin
 – 
Senior Advisor and China CEO Council Program Director, The China Centerfor Economics and BusinessDecember 19, 2011In recent months, the off-shore RMB market development has accelerated, driven by a number of regulatory and market trends, including signs of tightening Variable Interest Entity (VIE)
1
policyand growing concerns by overseas investors in China firm risk. With several companies listed
abroad “going private”, are we on the verge of a “return home” of US and Europe listed Chinese
firms?Underlying the trend is Beijing's four-year policy of wanting to elevate and extend RMB use intrade settlement and capital markets in Asia, and in essence have an RMB capital
market run “theChinese way”
as a viable alternative to major non-RMB global capital markets.One probably unintended consequence of this initiative is improved access for MNCs to RMBfunding sources in Hong Kong
 – 
and, moreover, from foreign banks with whom they areaccustomed to working.Another unintended consequence is Shanghai potentially being eclipsed by Hong Kong in its driveto become a global financial center by 2020, thus putting pressure on Beijing regulators toaccelerate reform on the Mainland in order to give Shanghai a
level playing field
with HongKong.Longer-term, the scaling up of a highly marketized RMB market in Hong Kong will inevitablyforce further marketization in onshore financial markets.Continued appreciation expectations for the RMB are essential to this evolution, and that is by nomeans a foregone conclusion. As RMB activity has grown and diversified off-shore, debate hasgrown among Beijing's leadership as to whether their currency is getting too exposed to marketforces and becoming too mobile.There is never a shortage of planning documents available in China to apprehend the majordirection of the State's interest and plans for the economy and industries. But there are many morenuanced trends for which it is difficult to know if they are intended or unintended consequences of major policy strategies. One such trend is the
return home
of many Chinese companies fromprevious listings in US or European equity markets to China or the Asia Pacific region. Acompelling mix of policy and market forces is converging to bring this about.
1
 
See: http://www.chinaaccountingblog.com/weblog/explaining-vie-structures.html for an excellent explanation of VIEs and how they work.
 
 
Exclusive for China Center Members
 –
Not for External Distribution
 
China Quick Note
 – 
December 20, 2011
Returning Home
Page 2 of 5
 
In this QuickNote, we identify several such forces: some due to changes in regulation and somedue to market dynamics. How significant or sustainable the forces are will be known in the courseof time; but at present, in the aggregate, they appear to promise an acceleration of Asian financialmarket growth
 – 
concurrent with the growth of the
RMB zone
. If these developments grow,thrive and succeed, there will be a substantial impact on global capital markets, a considerable lossof leverage by US markets, and quite possibly a pronounced ascent in Asian regional capitalmarkets of 
the Chinese way
of doing things.The expansion of RMB equity markets to tap into liquidity in Hong Kong, Singapore, andelsewhere is one of the key forces behind the trend. Lining up for listing is a combination of newlistcos and once-listed companies returning from abroad that have gone private and plan to reliston RMB exchanges inside and outside China. As the RMB zone expands, pulling Chinesecompanies towards it, intensifying regulatory pressure and friction points with Chinese listings inthe US and Europe, as well as flagging international investors sentiment toward Chinese issues
 – 
 perhaps a long-term affliction
 – 
are pushing Chinese companies listed abroad to
return home
.Meanwhile, the RMB continues to expand its overseas role for both trade settlement andinvestment. We have followed this trend in several previous QuickNotes
2
.
Amidst concerns aboutvolatility in US Dollar and Euro assets, Beijing is liberalizing cross-border capital accounttransactions, especially in RMB, which will network the capital markets in the Pearl River Deltaand eventually more broadly throughout Asia.Media coverage of the RMB expansion is becoming extensive now. In 2004, personal RMBdeposits in Hong Kong were first permitted, and the first bond issuance by Mainland institutionswas only in 2007. The trade settlement pilot schedule was started just two years ago in 2009.Only last year, in 2010, were RMB corporate bonds permitted.Since 2007, upwards of one trillion RMB has accumulated in Hong Kong, and after the Dim Sumbond market went corporate, it became the least expensive place in the world to borrow RMB.Between the founding concepts that launched the RMB in Hong Kong's commercial markets fiveyears ago and the August 2011 visit of Vice-Premier Li Keqiang and People's Bank GovernorZhou Xiaochuan to Hong Kong, the RMB abroad unswervingly evolved from being a fund raisingsource for Chinese financial institutions to a trade settlement currency to a Hong Kong capitaltransaction settlement currency to become a cross-border investment currency. Among otherthings, this has enabled the Chinese government to use its own currency to make acquisitions inHong Kong, its sovereign territory, where a separate SAR-only currency remains, in theory, thesole legal tender.One critical condition under which the RMB abroad has been successful is obvious enough, thecredibility of the currency and expectation of its appreciation. This is a lynchpin that is absolutelycritical to the sustained growth of the RMB
’s
international role, and by extension the healthygrowth of RMB financial markets on and off the Mainland. Decisions on what currency to holdassets will be made by investors based on the potential appreciation of the currency and theinflation prospects of its home market.For nearly a decade, there has been a global perception of the RMB as an undervalued currencythat can only get stronger. It has only been very recently that some wealthy RMB holders haveallegedly begun diversifying into assets based in other currencies. The first three quarters of 2011also saw an unusual net outflow of 
earnings on investment
; it is thought due to foreigncompanies repatriating profits. Do these data points and other anecdotes, including the very recentdowntick in the RMB spot market, suggest diminishing confidence in the RMB?
2
 
All China Quick Notes are available on the China Center member’s only website at 
 

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