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Renminbi internationalisation gathers pace

Renminbi internationalisation gathers pace

China is continuing its drive to make the renminbi (RMB) an international currency, as well as opening up its onshore financial system to international investors, thus increasing opportunities to hedge investments in China. Volkan Benihasim, head of FX cash trading at HSBC, explores how the bank’s unique presence in China and its thorough local knowledge can help investors reap the greatest returns when accessing the Chinese financial markets.

RMB made great strides towards becoming a truly international currency when it was included in the International Monetary Fund’s Special Drawing Rights in late 2016, alongside other major reserve currencies such as the dollar, euro, yen and sterling. 

Another major development in RMB’s internationalisation followed in the summer of 2018, when the People’s Bank of China (PBoC) – the country’s central bank – issued a circular that further opened China’s onshore financial system to international investors and, in doing so, offered a wider range of opportunities to hedge their investments in China.

With a presence in China for more than 150 years, HSBC is well positioned to cater to these investors, as its deep-rooted experience in the country and extensive local expertise puts it in a unique position to support their access to the Chinese financial markets. 

Volkan Benihasim, head of FX cash trading at HSBC, shares his insights into Circular 159’s significance.

How significant is Circular 159, issued by the PBoC in June 2018, for foreign investors?

Volkan Benihasim: The distinctive characteristic of Circular 159 is that it gives offshore investors greater freedom in accessing the onshore capital market in China. Previously, these investors had to be linked to an onshore bank to hedge their qualified bond and securities investments. Now they are able to choose to access either the onshore or the offshore FX vanilla products as well as the derivatives market to hedge their bond and equity exposures as best fits their hedging needs. Financial institutions and corporates will be able to access these products as long as they can prove a real need for hedging instruments.

This is particularly significant for investors who previously may not have had access to the onshore market and needed to rely solely on offshore facilities for their hedging needs. Now, international investors are able to hedge their RMB exposure using either the offshore CNH or the onshore CNY.

 

How are CNH and CNY being affected by this development?

Volkan Benihasim: The new policy allows offshore investors to access both onshore and offshore markets for the FX hedging solution of their choice. When there is a big gap in two markets, offshore investors can switch their hedging from an expensive market to a cheaper market easily. This will help bring greater convergence between CNH and CNY.

 An investor or corporate would only need to prove that their need for activities, such as hedging, is in line with their asset holdings in the onshore market. As China continues to open up, investment channels to offshore investors and related FX hedging activities will increase accordingly, thereby narrowing the gap between the onshore and offshore curves.

 

What impact is this having on RMB as a transactional currency?

Volkan Benihasim: China has promoted the use of RMB as a trade, investment and reserve currency from the outset of its internationalisation process, and Circular 159 is an integral part of this policy. RMB is already widely used as a currency for cross-border transactions by many Asian corporates. This new policy is providing a strong push for further RMB investments in China.

 

What products and channels does Circular 159 bring into scope?

Volkan Benihasim: While the new policy covers a wide range of FX instruments – including spot, forwards, swaps, cross-currency swaps and options – FX forwards and FX swaps are particularly relevant as these can now take advantage of the onshore interest rates.

To facilitate international investors’ access to these instruments – either onshore or offshore – HSBC has put in place a dedicated onboarding process in line with Circular 159. Through HSBC’s global network of offices, we can assist overseas clients with access to RMB in a simple and direct manner. And – as a direct market participant in the China Foreign Exchange Trade System – HSBC Hong Kong can provide investors with access to the Chinese onshore FX market.

HSBC can also guide international institutional and corporate clients through the various channels that have been brought into scope by Circular 159 to facilitate their investments into China capital markets, as well as cross-border business with China. These include the China Interbank Bond Market, the Bond Connect and Stock Connect schemes and the Renminbi Qualified Foreign Institutional Investor initiative.  

HSBC has one of the largest global RMB networks, with established RMB capabilities – in terms of trade settlement and payments – across 50 markets, and has been recognised as the top global RMB bank in many industry surveys and rankings.

The author

Volkan Benihasim began his banking career in 2001 and joined HSBC in Turkey 15 years ago. He has extensive experience in FX, rates and credit. In 2017, Benihasim assumed the role of head of FX cash trading, Asia Pacific at HSBC. Prior to this he was head of local currency rates and credit for Europe, the Middle East and Africa. Benihasim currently runs FX cash business globally following his recent promotion.

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