Here in London when we look East, we wonder what will 2015 bring for CNY and CNH. Its affect on Asia and the wider world.
I recently sat on the London - Singapore RMB Forum Roundtable (for more information click here) with Charles Roxburgh Director-General, HM Treasury, and Leong Sing Chiong, Assistant Managing Director, MAS as well as a number of both Chinese and International Banks on the future of RMB, its hurdles, it’s increased use, and it’s turnover.
Some of the comments made during the day were particularly interesting;
• High CNH activity is eating up credit and affecting other non CLS currency lines as a result.
• CNH in London shows no difficulty with price or depth of liquidity – which is unusual given the large size of average CNH trades
• Perhaps no surprise that CNY was 80% NDF and is now 80% CNH but the arb which was 300 points is now only 100 points.
Something the PBoC is likely to be happy with.
One Chinese Bank made the rather broad yet insightful statement that what the RMB market needs is Reform, Liquidity, Credit and Education in order to grow. Which had me thinking we could be around any table talking about any market in history – whether at the birth of the Euro to Spice trading in 17th century. From Bretton Woods to a Dutch Tulip auction - all markets need these elements in order to grow and to sustain the very real economic opportunity that the RMB represents for the FX market.
Another Chinese bank made the rather intriguing comment that the main issue with RMB reform in particular is it’s all in Mandarin… creating an issue for English and Cantonese speakers alike.
Especially when trying to clarify exactly what the changing rules were for corporate clients who run on and offshore businesses with what they can and cannot do with RMB based transactions.
This difference was driven home quite remarkably by one presenter when he showed a slide in Mandarin asking the group “ well you all know what that says don’t you” many heads were shaking and shoulders shrugged amongst the local Singaporean and Cantonese speaking attendees – until it was revealed as the Mandarin symbols for Happy Chinese New Year.
RMB reform documentation solely in Mandarin is indeed a big problem.
One of the more direct discussions was from a slide using ABS data on volatility comparing:
• Percentage move in 2014 of; CNH at 1.98% versus Euro at 22% and JPY at 20%.
• Compared with 3 month Vol level of; CNH at 3.7% and Euro at 10.9% and JPY at 10.6%
Its important to note these numbers were as of early January.
Even as a restricted currency trading within a managed band how much is RMB internationalisation affected by its low volatility or is its growth the result of low volatility in the first place?
You can’t internationalise without attracting some risk or even embracing it and there are already some Chinese corporates weary of what a move in CNH will have on their bottom line.
The idea of a line in the profit and loss statement called ‘Foreign Exchange Losses’ will be quite painful for a number of Chinese firms, and what about the other end of the trade?
At last count here are now 15 RMB clearing cities - but really at the end of the day when you think about it only 2 :
- Onshore and Offshore
While many cities have competed to be a clearer city and announce their local Chinese Bank who will perform that role. Luckily the Shanghai Free Trade Zone is not seen as a threat to London or Singapore trading volumes. For the main reason that China wants to internationalise and you can’t do that staying at home inside China.
R5’s political and policy specialist for China, Eva George thinks “the People’s Bank of China’s first explicit reference to the goal of ‘RMB internationalisation’ last month sets the tone for 2015, and demonstrates the central bank’s commitment to policy measures to support the phenomenal market growth of the past few years.
Just as another year of the Goat, 1979 was a key year for Chinese economic reforms, 2015 looks set to be a significant year for the RMB as well.
I started Chinese New Year this year at Banqueting House in Whitehall as a guest of InvestHK and while the honorable band played and the lion ate the bok choi. We ate the shrimp dumplings – (which weren’t too bad for a govt run event…its banqueting house after all) – I was stuck by one question:
Is this all about to kick off… is this all just around the corner?
I finished Chinese New year in Singapore with Lou Hai for lunch with several Chinese banks – where the food was naturally remarkably better and the interest in developing international ties very high – but its not ready yet.
Chinese banks suffer from both technical and credit issues, long internal procedure lifecycles and a long term domestic focus, and who can blame them ?
Even the largest and most advanced banks suffer from the same issues and those banks have weathered the storm of the creation of the Euro, the lay offs and consolidation that resulted only to face electronic erosion of margins and increased competition for market share and relevance.
That’s even before the recent regulatory changes, split liquidity, new capital requirements, and market scandals.
At the time of writing the new China International Payment System (CIPS) was rumored to be ready to launch later in the year of the Ram – but it does beg the question – do they really want to do this now ? Is the time right ?
Would it be sheep to the slaughter or the silence of the lambs ?