Survey

Renminbi

Europe ready for the renminbi Survey

As the Chinese authorities lift restrictions and open up the renminbi market stage by stage, the significance of what is unfolding has not gone unrecognised in Europe, and, according to a recent survey by The Banker, it is not only those already doing business with the country that are interested in the renminbis development. As London takes steps to establish itself as an offshore renminbi financial centre, many are anxious to take advantage of the opportunities soon to be available. writer Jane Cooper

The rise of the renminbi is a hot topic for the banking industry, and awareness of the role of the Chinese currency has spread beyond Hong Kong to London, which is establishing itself as an offshore renminbi financial centre. Many banking executives have already recognised the potential for the renminbi and envisioned a world where it is a fully convertible reserve currency of comparable status to the US dollar. Although reluctant to predict a date for when such a vision will come to fruition, banks are keeping pace with the developments of the Chinese central bank as it

This article appears in the July issue of The Banker - Reprinted with the permission of the publisher

Survey
Renminbi

Question 1: Does your company conduct business with China?

Yes (go to question 2) No (go to question 3) Total 148 54 202 73% 27% 100%

Question 6: Which of the following factors might influence your decision to conduct renminbi-related transactions in London, rather than Hong Kong or mainland China?
Access to other markets Availability of advisory services/strategy/research/financial expertise Availability of straight-through processing/payment infrastructures for cash, securities and other instruments Effective regulation/supervision Extended settlement hours 89 102 86 103 59 107 87 109 59 50 67 35 129 58 77 8 44% 50% 43% 51% 29% 53% 43% 54% 29% 25% 33% 17% 64% 29% 38% 4%

Question 2: If you answered yes to Q1 above, how would you bestdescribe the relative proportion of your companys business with China
High and growing High but not growing Moderate and growing Moderate but not growing Low and growing Low and not growing Total 31 3 36 0 42 2 114 27% 3% 32% 0% 37% 2% 100%

Language Availability of largest currency market in the world Availability of liquidity Physical proximity Price Quick and effective settlement Availability of cash management services Time zone Transaction costs Transparency/price discovery Other

Question 3: Does your company currently use renminbi products and services?
Yes (go to question 4) No (go to question 5) Total 105 97 202 52% 48% 100%

Question 7: In which of the following areas do you foresee related opportunities arising from the growth of offshore renminbi markets, such as London and Hong Kong?
Asset management Billing/invoicing Bond origination and trading Capital raising/access to renminbi liquidity Cash management High 83 (41%) 57 (28%) 92 (46%) 86 (43%) 67 (33%) 138 (68%) 43 (21%) 34 (17%) 79 (39%) Medium 81 (40%) 83 (41%) 78 (39%) 89 (44%) 83 (41%) 53 (26%) 103 (51%) 90 (45%) 83 (41%) Low 31 (15%) 47 (23%) 25 (12%) 21 (10%) 43 (21%) 9 (4%) 46 (23%) 53 (26%) 27 (13%) N/A 7 (3%) 15 (7%) 7 (3%) 6 (3%) 9 (4%) 2 (1%) 10 (5%) 25 (12%) 13 (6%)

Question 4: If you answered yes to question 3,in which location do you have your renminbi banking relationship?
Hong Kong London Other Total 40 10 32 82 49% 12% 39% 100%

Currency trading Equities Remittances Trade finance

Notes: figure is the count of respondents selecting the option; percentage is the total respondents selecting the option.

Question 8: Do youagree or disagree with the following statements? Chinas currency in 10 to 15 years time will be
Strongly agree Agree Indifferent Disagree Strongly disagree 6 (3%) 4 (2%) 2 (1%) 18 (9%) 17 (8%) 48 (24%)

Question 5: How important will the renminbi be in 10 to 15 years time?

Hugely important Moderately important Unimportant Total 138 63 1 202 68% 31% 0% 100%

A reserve currency of similar status to the dollar A reserve currency of similar status to the euro A reserve currency of similar status to the Japanese yen A lesser reserve currency Convertible, but limited use outside China Domestic currency with restricted convertibility

15 (7%) 23 (11%) 22 (11%) 5 (2%) 7 (3%) 4 (2%)

74 (37%) 92 (46%) 93 (46%) 50 (25%) 69 (34%) 26 (13%)

35 (17%) 27 (13%) 46 (23%) 47 (23%) 28 (14%) 25 (12%)

72 (36%) 56 (28%) 39 (19%) 82 (41%) 81 (40%) 99 (49%)

Notes: figure is the count of respondents selecting the option; percentage is the total respondents selecting the option.

gradually lifts restrictions, putting the currency on the path to internationalisation. Establishing offshore centres beyond Asia is crucial for the currency to internationalise, and now the awareness of the renminbi has spread beyond those working in the banking industry. A survey by The Banker demonstrates that awareness has now spread to Europe, where professionals even those outside the banking industry, and who do not have a business relationship with China are aware of the future significance of the Chinese currency.

Question 9: Could a significant offshore renminbi market develop in London?

Highly likely Likely Possible, but unlikely Unlikely Total 74 117 10 1 202 37% 58% 5% 0% 100%

Question 10: how is your company following the internationalisation of the renminbi?
Closely To some extent Not at all Total 93 85 24 202 46% 42% 12% 100%

This article appears in the July issue of The Banker - Reprinted with the permission of the publisher

Survey
Renminbi

Opening up
The renminbi still needs to go through a number of stages before there is no differentiation between offshore and onshore renminbi and there are no restrictions in moving renminbi to and from mainland China. For it to become a fully convertible reserve currency China needs to open up its capital account, but so far many observers have been surprised by the pace of change. Using renminbi for trade settlement the first stage of becoming an international currency now has few restrictions, if there is genuine trade underlying the transaction. The trade settlement scheme is currently limited to certain banks, but now it is possible for all mainland Chinese companies to use the renminbi, as what started as a pilot scheme in 2009 has gradually been rolled out across the whole country. Chinese importers and exporters previously had to be registered as mainland designated enterprises, but as of June 2012 that requirement was no longer necessary. In the same month another hurdle was removed when the Peoples Bank of China the central bank implemented a pilot scheme in Shanghai enabling local banks and companies to apply to reduce the documentation that is necessary for each transaction. While there is still red tape involved in proving that transactions are for trade purposes, the latest steps to loosen the restrictions demonstrate the direction in which the Chinese central bank is moving. For importers and exporters, paying in renminbi removes the foreign exchange risk and speeds up the receipt of payments. Although renminbi trade settlement has been possible for companies doing business with China, the full potential of the scheme has not yet been realised. Anecdotally, banking executives have said that Chinese companies feel their international trading partners have not been ready to settle in renminbi and vice versa. The recent steps by the Peoples Bank of China could provide the tipping point that is needed to make renminbi trade settlement the norm for those doing business with China, as the process is now quicker and simpler.

cess is almost complete, and then the next stage of the renminbis internationalisation is to use the currency for financial, ie. nontrade, transactions. Another marker of the renminbis increased international significance was the decision by Chinas central bank to allow direct trading between the renminbi and the Japanese yen on the inter-bank foreign exchange market, which came at the end of May 2012. As the adoption of the renminbi seeps into all areas of the financial system and becomes internationally relevant, it is inevitable that renminbi financial centres will develop around the world. Hong Kong was the birthplace of the offshore renminbi market, and has provided a key part of the infrastructure needed for clearing trade transactions, with payments being routed through the Bank of China Hong Kong on their way to mainland China. In terms of financial transactions, in 2010 global fast-food chain McDonalds became the first foreign company to issue an offshore renminbi-denominated dim sum bond. While the emergence of other offshore renminbi centres could be seen as a threat to the renminbi business that is currently being done out of Hong Kong, it is inevitable that if the currency is to become international, other financial centres around the globe have to be involved in the currencys development. Singapore has been challenging Hong Kong as a renminbi financial centre, but while China retains control over its capital account, observers argue it is likely that Hong Kong will retain a special status in the internationalisation process because of its unique relationship with China.

Question 11: Which European financial centre do you expect to become the most important for offshore renminbi-related activity?
Amsterdam Copenhagen Frankfurt Geneva Helsinki London Luxembourg Madrid Milan Munich Oslo Paris Stockholm Vienna Zurich Other Total 0 0 5 0 0 187 1 0 0 0 1 3 0 0 2 3 202 0% 0% 2% 0% 0% 93% 0% 0% 0% 0% 0% 1% 0% 0% 1% 1% 100%

Taking shape
Moving further afield, developments are gathering pace in establishing London as an offshore financial centre. London is uniquely positioned because of its time zone that places it between Asia and the US, and has already established itself as the major financial centre in Europe. Added to this has been the drive by the UK authorities to establish the city as an international renminbi centre. In April 2012, the City of London Corporation launched the London Renminbi Initiative. In the same month, London witnessed a landmark bond issue when HSBC raised Rmb2bn ($314m) in the first dim sum bond in London. Although there has not been a flurry of similar transactions, the move was significant as it marks an important step on the path to internationalising Chinas currency.

Stepping stones
Such steps demonstrate the gradual moves that the Chinese authorities have been making to liberalise the currency. The stages have been carefully planned, with each step starting as a pilot scheme in one area then gradually being extended so it eventually becomes widespread. With trade settlements, the liberalisation pro-

This article appears in the July issue of The Banker - Reprinted with the permission of the publisher

Survey
Renminbi

Stakeholders in Londons financial services industry including the UK Treasury have been co-operating with their counterparts in Hong Kong to establish the infrastructure for the renminbi to develop as an international currency. In May, the London-Hong Kong Forum agreed to extend the operating hours of the clearing bank in Hong Kong to 23.30 so that it could be open for business into Londons afternoon hours. At the start of 2012, when these plans were first discussed, Norman Chan, chief executive of the Hong Kong Monetary Authority, said: By establishing appropriate linkages with Hong Kongs offshore renminbi platform, banks in different parts of the world will be able to provide a comprehensive range of renminbi banking and financial services to meet the rapidly increasing demand of their customers. Hong Kong and London are well placed to develop offshore renminbi business and closer co-operation between the two financial centres will bring about mutual benefits and a win-win situation.

already do business with China, and of those 27% said that the proportion of their companys business with China is high and growing. Another 32% said that the proportion of their business with China is moderate and growing, and another 37% said that it was low and growing. These results show that, regardless of the current extent of their dealings with China, the level of interaction with the country is growing in many companies, which is in line with the projections for the future dominance of the Chinese economy.

Question 12: The liberalisation of Chinas currency, the renminbi, primarily means foreign entities will have more freedom to access Chinese markets and renminbidenominated funds. Are you aware of developments to liberalise the renminbi?
Yes No Total 185 17 202 92% 8% 100%

London calling
For now it is Hong Kong that dominates the market in terms of offshore renminbi products. For the survey respondents that use renminbi products and services, 49% said that their renminbi banking relationship was in Hong Kong, with only 12% having a banking relationship in London. While this seems like a small proportion, there was widespread acknowledgment that the renminbi would be significant in the future. When asked of its significance, 68% of respondents said that the renminbi will be hugely important in 10 to 15 years. On the issue of the renminbi as a reserve currency, 46% of respondents agreed that the currency would be a reserve currency of similar status to the euro in 10 to 15 years. However, respondents were more sceptical about its status as a reserve currency compared to the US dollar. When asked of this eventuality, only 7% strongly agreed with the statement that it would be similar to the US dollar in 10 to 15 years, while 37% agreed and 36% disagreed. When asked where the opportunities lie in the renminbi market, 68% of respondents identified currency trading and rated the potential for this area highly. Of the European cities that were given as possible financial centres for the renminbi, London was the clear leader, with 93% selecting the UKs capital city. In an open question to elaborate on their reasoning for this decision, the majority responded that it made sense for London to be the renminbi centre as the city has already been established as the major financial centre of Europe. One respondent commented that, after Hong Kong, London will once again establish itself as an important marketplace for securities, similar to the Eurobond development in the late 1960s. Such sentiment, as demonstrated in this survey, shows that as the renminbi continues on its path to internationalisation, its significance cannot be ignored.

Following developments
The significance of such steps is apparent to many professionals in Europe and awareness of the currency extends beyond those working on making the internationalisation process happen. The Bankers survey was conducted among more than 200 professionals across various countries in Europe. The respondents were made up of senior executives and senior management-level professionals, with the majority working in the financial services industry. When asked whether they were aware of the developments to liberalise the renminbi, an overwhelming majority 92% of respondents said that they were aware of the developments, and when asked in more detail about the renminbi, their answers show how relevant the Chinese currency is to many businesses in Europe. When asked if their company is following the internationalisation of the renminbi, 46% replied closely and 42% said to some extent. Of the respondents, a 73% majority

Closer co-operation between [Hong Kong and London] will bring about mutual benefits and a winwin situation Norman Chan

This article appears in the July issue of The Banker - Reprinted with the permission of the publisher