South East Asia: Renminbi on the March – June 2012

British High Commission Singapore

Summary

The Renminbi is growing fast as a means of exchange in SE Asia. It started from zero and there is a very long way to go until it becomes a true international currency but the politics and business opportunities it presents means SE Asian nations are keen to support China’s ambitions. While the time difference allows London to position itself as a complement to Hong Kong, SE Asian countries will have to work harder to convince China they are not rivals.

Detail

China’s gradual Renminbi internationalisation began in 2009. This report assesses developments in SE Asia.

Renminbi as a currency of trade

Growth from a zero base initially meant huge percentage increases masked small volumes.  The market has matured and now significant volumes are being traded. Standard Chartered figures show that in February 2012 17.6% of Singapore’s trade with China/HK was settled in Renminbi, the same figure for Taiwan.  Others of note include Japan (2.1%) and S Korea (6.5%). The Asia-Pacific Average is 6.6%. After a fast start (2009-2011), these percentages remained virtually flat over the past year.  

Renminbi as part of foreign exchange reserves. 

Malaysia was the world’s first central bank to publicly add RMB to their FX reserves in August 2010. Thailand followed in Nov 2011. Philippines also holds RMB reserves.  All these holdings are thought to be small (<1%).

This leaves seven members of ASEAN who have chosen NOT yet to include Renminbi as part of their FX reserves.  Reasons for this include the lack of Renminbi convertibility, and the need to secure a license to purchase Chinese government paper.  

Renminbi as a financial instrument.

Issuance of Renminbi “Dim Sum” bonds in Hong Kong (and recently London) has captured newspaper headlines.   As yet there is no centre for this in SE Asia.  Retail depositors are already able to open RMB accounts throughout most of SE Asia, allowing for speculation on RMB appreciation.  But given that SE Asia’s currencies are expected to rise in line with the RMB, these are not as popular as they have been in HK (whose currency is pegged to the $US).

SE Asia’s support for Renminbi internationalisation

To move forward in these three areas, China has to unpick an enormous (and complicated) web of capital controls.  SE Asian nations have been keen to support China’s ambitions for a number of reasons. Some (e.g. Malaysia) share China’s aim to reduce $US domination. Singapore (like London) sees this as new business for their financial sector.  Others (Thailand, Indonesia, Philippines, Vietnam) take a pragmatic view: this is something their most powerful trading partner wants, and it is good politics and business sense to toe the line.  These differing motives likely explain the varying levels of enthusiasm from SE Asian governments, with Singapore and Malaysia clearly the keenest.

Supportive policies include agreeing currency swap lines (Malaysia 2009, Indonesia Singapore 2010, Thailand 2011).  It also involves changes to financial plumbing. Developments in Malaysia illustrate the point:

The Ringgit is now quoted on China’s Foreign Exchange Trade System (since 2010, the 6th and first non-major currency);

• with reciprocal arrangements (2012) adding Renminbi settlement to Malaysia’s electronic transfer payments system; 

• participation (with HK’s Monetary Authority and Euroclear) in a pilot offshore trading platform;

• Malaysia’s Central Bank opened a dedicated office in Beijing in March 2012; and.

• Malaysia’s sovereign wealth fund (Khazanah) issued a Sharia Dim Sum Bond in HK in 2011.

Singapore has been making similar efforts, and the Monetary Authority of Singapore (MAS) is opening an office in Beijing. But otherwise it’s been frustrating for them.  In April 2011, Goh Chok Tong (then Chairman of MAS) announced, that China would choose a Chinese bank to issue RMB trades here, but it has not happened.  Part of the problem is that Singapore would compete with HK, and neither China, nor HK, want that at present.

London, on the other hand, can complement HK with European (and possibly US) contracts going through London, with Asian ones done through HK.  Singapore is thought likely by some commentators to explore options which play to its advantages – eg trade finance – and it is possible that this may lead to competition with London in the future.

Funny Money

The arbitrage opportunities created by different on-shore and off-shore interest rates (and exchange rates) are a banker’s equivalent of a candy-store.  Some observers suggest that the majority of the financial transactions to date reflect arbitrage trading by banks and companies instead of genuine trade – particularly Chinese companies who are able to raise funds (about 2 percentage points) cheaper in HK.  These same contacts say that the arbitrage opportunities are falling, and this may be reflected in the levelling-off of market growth. This arbitrage activity means that the official data overstates (possibly to a large extent) the amount of genuine merchandise trade conducted in RMB.

Comment

SE Asia’s politicians and businesses are playing an enthusiastic role in supporting Chinese ambitions.  They have invested in long and deep relationships with China at the highest levels. That the first offshore RMB bond was issued in London (and not Singapore) reflects not only the very active and innovative diplomacy that went into securing that decision, but also the fact that the UK’s market weight, sophistication, and time-zone make the UK relationship one of particular value to China in this area.

Disclaimer

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