Special Report | 9 October 2013
Do you Renminbi?
 The internationalisation of the Renminbi is no longer just a matter of long-term strategising
 Supported by the increasing dominance of China’s economy, the political will of China’s new leaders and the
deepening of the financial markets, the advent of the Renminbi as a global currency is an irreversible trend
Contents
Summary
1
How did we get here?
3
Renminbi 2020
4
Developing onshore financial
markets
4
Capital account liberalisation
4
Do you Renminbi?
What all this means for you,
our client
7
Impact on banks
8
Summary
Impact on corporates
8
The Renminbi is likely to be a big part of your business sooner than you think. If
Impact on investors
9
you trade with China, you’ll be invoicing in it, paying it, and receiving it from your
clients. If you operate in China, you will be issuing debt in Chinese yuan (CNY) and
Conclusion
10
using CNY instruments to hedge your FX and rates risk. If you are running a global
portfolio, then the Renminbi will – sooner or later – be a key part of your investment
strategy, whether in FX, equity or credit products.
The internationalisation of the Renminbi is no longer only a matter of long-term
strategising, but something which requires immediate action. In looking at the
historical development of the euro (EUR), now a significant international currency,
and the Japanese yen (JPY), which has gained increasing importance in bilateral
trade since the 1980s, we realise that there is an opportunity cost for not being
prepared to respond to, and capitalise on, these global shifts. In the case of the
Renminbi, there is no defined timeline for the liberalisation of the capital account;
however clients will still want access to China’s growth. The current account (goods
and services trade) is open and, as each day passes, more and more
organisations are transacting in Renminbi.
‘Do you Renminbi?’ will quickly become a question to which you will need to
answer ‘Yes’.
The rise of the Renminbi heralds a major change in the global financial system and
it is happening much faster than people think. This report is designed to explain the
CNY’s journey to becoming an international currency. We make a number
of predictions:

By 2020, we expect 28% of China’s international trade to be denominated in
Renminbi, some USD 3tn a year.

By 2020, we believe the US dollar (USD), EUR and CNY FX and rates markets
will dominate global financial markets. Daily CNY FX turnover should grow from
the current USD 120bn to exceed USD 500bn.

We expect China’s capital account to be ‘basically open’; i.e., open but with some
Chinese characteristics, by 2020. Direct investment will flow much more easily
than today, with only large deals subject to approval requirements. Portfolio flows
will take place within significantly expanded QFII and QDII frameworks.

As the onshore capital markets become more accessible to offshore investors, the
offshore market will also expand. We anticipate that the offshore Renminbi debt
market to grow 30% a year, and to be worth CNY 3tn (USD 500bn) by 2020.

We expect a cross-border Renminbi payment clearing system China International
Payment System (CIPS) to be fully operational by 2015. This will ensure global
Renminbi liquidity.

We expect the Renminbi to be a basically freely floating currency, and SHIBOR to
operate as China’s equivalent of the federal funds target rate.
The journey towards Renminbi internationalisation will not be without challenges.
China’s capital account controls will not disappear quickly, but the trend has been
set in motion. We believe Beijing clearly understands the risks and the challenges
involved in this project.
As a bank with a long-standing presence in China and the region, we have been
involved in this market since before the beginning – helping the authorities
understand how trade settlement systems could be re-engineered to carry
Renminbi, advising our multinational and local Chinese clients on the new funding
opportunities offered by the offshore market, helping our banking partners evolve
based on client needs, being a driving force in developing CNY centres and
much more.
Despite our close involvement, even we have been surprised by the speed at
which the CNY offshore markets have developed. Our proprietary Renminbi
Globalisation Index (RGI) has been tracking this development since 2010. We have
learned not to underestimate the likely pace and scale of growth that will take place
from now until 2020.
We hope this report helps you understand how your CNY business may evolve
between now and 2020, and that it will help to prepare you for that future.
We first introduce how far Renminbi internationalisation has already come. We
then consider how policy will evolve in the next five years – most importantly, how
the capital account will be opened and how the domestic financial markets will be
reformed. We then lay out our vision of the Renminbi’s future to 2020 across four
critical areas:

CNY trade settlement

Commodities trade

CNY foreign-exchange trading

Offshore CNY debt, loan and equity-market development
In the concluding section, we explain what these reforms will mean for different
types of clients.
9 October 2013
2
How did we get here?
The Renminbi made its first baby steps outside mainland China in the early 2000s.
In January 2004, retail depositors in Hong Kong were allowed to convert some of
their savings into Renminbi. In October 2009, China’s Ministry of Finance issued
the first Renminbi-denominated offshore bond. But July 2010 marked the real takeoff, when an agreement between the People’s Bank of China (PBoC) and the Hong
Kong Monetary Authority (HKMA) allowed banks in Hong Kong, and their clients, to
start experimenting with CNY accounts and CNY business.
From 2010 on, Hong Kong-based banks starting looking seriously at helping clients
invoice and settle trade in Renminbi – the foundation of this experiment. In August
2011, then senior Vice Premier Li Keqiang visited Hong Kong and laid out his
vision for Renminbi globalisation. That speech sent a clear and forceful signal that
the central government was fully behind the policy.
Since then, central banks around the region have been invited to invest in China’s
onshore bond market, an active and innovative CNH (offshore Renminbi) FX
market has blossomed in Hong Kong, and thousands of companies worldwide
have come to grips with invoicing clients in CNY.
Our RGI shows that across four areas – trade, deposits, bond issuance and FX
trading – the offshore Renminbi markets have steadily expanded over the past
three years (Figure 1).
Figure 1: RGI rose 61.8% y/y, 1.8 m/m in August
Singapore and London became eligible markets and were added to the RGI in August 2011;**Taiwan included in July 2013;
Source: Standard Chartered Bank
9 October 2013
3
Renminbi 2020
Our Research team has published a report on how the market is developing today.
This section sets out some of the highlights of the report. For the full version of the
report, please see September RGI update.
Four critical areas have been considered as to how policy will evolve in the next
five years and map the offshore Renminbi’s future to 2020:

CNY trade settlement

Commodities trade

CNY foreign exchange trading

Offshore CNY debt, loan and equity market development
Policy direction
1. Developing onshore financial markets
China’s financial sector will see a rapid transformation over the next seven years.

As interest-rate reform progresses, market-based loan-pricing benchmarks – such
as SHIBOR and government yield curves – should become viable in 2014-15.

As interest rates are freely set, a yield curve will take shape, allowing a real
bond market to grow. If the domestic credit-rating system can be improved
and a coherent bankruptcy framework introduced, China’s bond market should
grow strongly.

The private sector needs more support from the financial sector. Smaller
state-owned banks must boost lending on a non-collateralised basis. Rate
reform should help as banks seek to protect their margins by lending to firms
with higher rates of return than state firms.

We expect a large asset-securitisation market to develop by 2020 as banks
create more space for new lending.

A big clean-up of bad loans at banks is likely in the wake of the 2008-11 credit
boom. With a deposit insurance system in place in 2014, bank resolution will
become possible.
2. Capital-account liberalisation
The People’s Bank of China (PBoC) wants to open up China’s capital account and
allow some of China’s household wealth to flow offshore via regulated channels. It
wants Chinese companies to purchase more offshore assets and build overseas
businesses. The authorities are aware that opening the capital account too quickly
may increase economic volatility and risk increased flows of ‘hot’ money. Thus, as
Beijing opens up its bond market to offshore investors, it is starting cautiously by
allowing access only to central banks and sovereign wealth funds. Long-term
money managers will be next. Hedge funds are unlikely to get access.
We expect China’s capital account to be ‘basically open’ by 2020. Prudential
controls will remain in place, large flows will be closely monitored, and at times of
stress, the authorities will intervene as they think necessary. We also expect the
Renminbi exchange rate to be basically free-floating by 2020, although the PBoC
may retain the right to intervene during times of stress.
9 October 2013
4
Figure 2: How we see the capital account opening up to 2020
Direct
investment
Item
Current situation
Likely developments by 2020
FDI inflows
FX conversion requires
approval by local or central
SAFE/PBoC, depending
on size.
Strict controls on capital
repatriation.
Dividend remittance is
limited to once per year.
Restrictions on which
industries can be
invested in.
Free FX conversion, apart from
very large deals.
Foreign investment banned
only in a few strategic
industries.
Capital repatriation will be free,
but monitored.
More flexibility for timing of
dividend remittance.
Much more freedom of
investment in currently
restricted sectors.
ODI outflows
SAFE approval needed.
Only very large deals will still
need SAFE approval
Equity inflows
Managed with QFII and
RQFII quotas, which require
approval for each institution,
and FX inflow approvals.
Time limits apply on fund
repatriation.
Significant increase in QFII and
R-QFII quotas.
Repatriation approval only
needed for large amounts.
Lock-up periods removed.
Portfolio
investments:
(a) equity
(b) bond
Onshore equity Not possible.
issuance by
offshore
entities
To be permitted via the
establishment of an
International Stock Board.
Offshore equity CSRC approval required.
issuance
Elimination of all approval
requirements.
Offshore equity Only through limited QDII
purchases
scheme.
Large QDII expansion.
Platform for individuals to
purchase offshore equity
securities, initially likely limited
to Hong Kong and subject to
quota.
Bond
investment
inflows
Managed via QFII and
Big expansion of QFII quota;
PBoC approval and quotas, almost complete relaxation of
and remittance subject to
repatriation rules.
lock-up period.
Onshore bond Not allowed, except in case Extensive.
issuance by
of approved multilateral
offshore
agencies.
entities
Offshore bond NDRC approval required.
issuance
Led by MoF, to be allowed with
approvals only required for
large issues
Offshore bond Only through QDII scheme, Unlimited access for qualified
purchases
and by offshore
institutional investors.
subsidiaries.
Other channels Individual FX
conversion
Limits on individual
conversion, up to USD
50,000 equivalent each
year.
Allow individuals to convert up
to USD 100-200k and then
more. Likely need to report at
USD 1mn.
Source: Standard Chartered Research, IMF
9 October 2013
5
Trade settlement in Renminbi
The Renminbi trade settlement regime has become highly liberalised and
increasingly efficient in recent years. This is driving Renminbi internationalisation.
But there is plenty of room for growth. We expect Renminbi invoicing as a share of
China’s total trade settlement to increase significantly by 2020, in line with China’s
overall trade growth. This would in turn increase annual CNY settlement volumes,
raising the Renminbi’s share of global payments. This is likely to make the
Renminbi the world’s fourth-most-used currency behind the US dollar, euro and
British pound.
Commodity trade invoicing
One-third of China’s imports are commodities, and even a partial re-denomination
of this trade into Renminbi would significantly boost Renminbi trade flows. The
oligopolistic structure of China’s biggest commodity suppliers – of iron ore and
crude oil in particular – should help accelerate growth in Renminbi-invoiced
commodity trade once such flows reach a critical size. Renminbi invoicing is likely
to start with small one-off trades in crude oil and soybean imports, while iron ore
trade might be a late adopter. As the Renminbi is used by more countries,
commodities might be priced in CNY on exchanges. The acquisition of the London
Metals Exchange (LME) by Hong Kong Exchanges and Clearing Limited (HKEx)
should accelerate the opening up of China’s commodity market to global players.
FX market growth
China’s rapid economic growth and policy steps towards Renminbi
internationalisation should boost FX market turnover through 2020. On a cautious
projection, reflecting the absence of full convertibility, trading volumes could grow
25% annually in mainland China and 20% per year offshore, with a sizable share
traded in London, Singapore and other offshore centres. Trading turnover would
grow faster in case of full convertibility. Meanwhile, CNY derivatives markets for
hedging should grow strongly by 2020 on demand from companies and investors.
USD-CNY realised volatility by 2020 is likely to be similar to that of USD-TWD today.
9 October 2013
6
About the China (Shanghai) Free
Trade Experiment Zone
Figure 3: Taiwan has shown the fastest growth in Renminbi payments with
China and Hong Kong in the past year
The new China (Shanghai) Free
Trade Experiment Zone (CSFTEZ)
officially opened in September.
Comprising four areas of Shanghai
Pudong – the Waigaoqiao Free Trade
Zone, the Yangshan port, the Pudong
Airport area and the Waigaoqiao
Logistics Bonded Zone - the zone is a
national-level entity, not belonging to
Shanghai Municipality alone.
The main objective of the zone is to
create an area for more liberal trade
subject to fewer financial and
business regulations than the rest of
China. Many are speculating as to
how the zone will function and the
authorities have yet to finalise the
details. However, we believe that FDI
license approval will be easier in the
zone and full foreign ownership may
be allowed in more sectors. Greater
interest rate liberalisation, easier
cross-border lending, foreign debt
quota reforms and freer Renminbi
convertibility
have
also
been
proposed. CSFTEZ could also allow
duty-free imports and re-exports. We
believe that this zone will pave the
way for other similar zones over the
next few years.
Indeed, other cities are keen to follow
Shanghai. Local media has reported
that Tianjin, Guangzhou, Xiamen,
Qingdao and a number of other cities
have expressed interest in setting up
their own versions of the CSFTEZ.
We believe however that the
Shanghai zone will have to run
successfully for a year or two before
the State Council and other
regulatory bodies approve the
creation of new free trade zones. It is
also likely that Shanghai may one
day expand the zone to encompass
the whole Pudong district covering
1,210km2
versus
the
current
28.9km2.
In addition to the CSFTEZ, just
across the border from Hong Kong,
the Qianhai area in Shenzhen
launched in August 2010, is now
under
construction. While
the
CSFTEZ becomes a testing ground
for China’s economic reforms,
Qianhai is focused more on cooperation with Hong Kong in the
Pearl River Delta region.
It would be prudent for any
organisation to keep a close eye on
developments in these two zones as
regulatory evolution in relation to
them
could
materially
impact
business strategies
Dim Sum bond markets to catch up
with the size of Asian local-currency
bond markets
9 October
2013
Capital-market development
China’s offshore capital markets should grow strongly in the next decade,
supported by capital-account liberalisation, international use of the Renminbi, and a
push by global investors – particularly central banks and sovereign wealth funds –
to own Renminbi assets. We expect the offshore Renminbi bond market to grow to
become bigger than many Asian local-currency bond markets today, including the
Philippines, Indonesia, Hong Kong, Singapore, Thailand and Malaysia. Offshore
Renminbi loans extended by Hong Kong banks are likely to rise hugely by end2020 as lending to Chinese entities gradually shifts to Renminbi from other
currencies. Eventually, the offshore Renminbi market is poised to converge with
the onshore market as capital-account convertibility by 2020 harmonises
onshore/offshore exchange rates and interest rates.
What all this means for you, our client
The internationalisation of the Renminbi is a high priority for the Chinese
government and its imminent globalisation is further supported by our expectation
that China will become the largest economy by 2030.
As we discussed in the previous section, the rapid development of the onshore and
offshore market will continue to support a healthy base for the eventual opening up
of the capital account. Currently, over 13% of trade between China and Hong Kong
with the rest of the world is denominated in Renminbi and we expect this to reach
20% in 2014.
The PBoC issued a circular in July that simplifies CNY cross-border business
processes, including cross-border lending, cross-border settlement, guarantees
and the use of CNH bond proceeds. This move to increase adoptability of the
Renminbi, coupled with the growing global nature of the currency, signals a shift in
global financial markets and the creation of new opportunities for banks, corporates
and investors alike. Below we share with you what this could mean for your
business both now and in the future.
7
Impact on banks
International, regional and local banks need to clearly define how the Renminbi and,
more broadly, China play a role in delivering their strategies. The rate of regulatory
development and market forces, together with the increasing momentum of
Renminbi internationalisation, means that this has to be monitored carefully.
Organisational awareness of developments in CSFTEZ, Qinghai and the mainland
Chinese financial markets is critical to shaping strategy going forward. Banks should
give special focus to their asset-liability management for their CNY balance sheet. In
many of the offshore centres, CNY liabilities are growing faster than assets. Having
an efficient treasury management process to deploy funding raised in one location to
another with a higher yield is essential to future business development.
The relaxed RQFII rules in January 2013 now allow all eligible entities holding an
Asset Management licence in Hong Kong to apply for RQFII. Under the Revised
RQFII Rules, financial institutions registered in Hong Kong, and with their principal
place of business in Hong Kong, are now also eligible to apply for a RQFII licence.
This may open opportunities for banks.
However, there is still an active discussion among Hong Kong entities on how to
determine if a financial institution is registered in Hong Kong. It has been
announced that the RQFII scheme will be expanded to include Singapore, Taiwan
and the United Kingdom, so familiarity with the framework would be advantageous.
It is likely that licence prioritisation will be based on firms with close ties to China.
We recommend banks evaluate the benefits of a RQFII license and fully
understand the licensing procedure ahead of time if this is a desired development.
The upgrade of the China domestic real-time gross settlement system (CNAPS)
and the new China International Payment System (CIPS) could change the
clearing landscape for banks. We recommend examining the possibilities that
these infrastructure changes could present. CIPS will require significant planning
for internal operating systems to facilitate the interface. A project team should be
put in place and development resources earmarked to prepare for changes to the
clearing model.
In addition, raising internal awareness through educating client-facing staff to
competently lead dialogue with clients on the CNY’s fast changing regulatory
landscape is essential to remaining relevant and maximising opportunities for banks.
Impact on corporates
There are many benefits for businesses that get their strategy right for the
Renminbi. Some European MNCs who are early movers in adopting RMB into their
China businesses have reaped benefits, from enhancing liquidity and FX risk
management to extracting value from their supply chains.
Growth in the offshore CNY
bond and equity markets,
combined with significant
capital account liberalisation,
will likely attract long-term
international capital to China
9 October 2013
Moving to Renminbi invoicing is currently mostly used for intercompany
transactions and led by the Corporate Treasury team, especially for firms which
have two-way flows with China. These companies would typically centralize their
FX management through establishment of sophisticated regional treasury centres
either in Hong Kong or Singapore. Many of these companies also leverage on the
most recent regulatory changes in cross-border lending, which offers the
opportunity to effectively put the Renminbi into the currency basket for overall
liquidity management. Cross-border lending makes it easier to move funds in and
out of China and to integrate China into global cash-management operations.
8
Easier access to offshore Renminbi debt and equity financing can then provide
more benefits to the business. There are now more options for managing the risk
related to Renminbi transactions with interest-rate swaps (IRS) and cross-currency
swaps. While the market for these financial products needs to be developed further
for more long-dated hedging tools, it is a positive start.
As the adoptability of the Renminbi increases with simplification in trade document
requirements and partial capital-account movement, the next step towards reaping
bigger benefits for corporates would be extension to third-party payments or
collection, depending on what business you are in. This could help to create more
transparency in pricing and improve supply-chain stability, especially during times
of FX market volatility; and to expand your suppliers’ and buyers’ bases to those
who do not have easy access to foreign currency, especially those in the inner part
of Mainland China. To achieve this end, seamless collaboration across different
departments would be required, rather than just a treasury function. The decision to
adopt the Renminbi must be incorporated and understood by the entire business
value chain and requires senior management buy-in. Top-down endorsement will
be important to resolving internal challenges such as investment needs for an ERP
system upgrade as well as human inertia, or resistance to change.
The CNY also opens up a new avenue for corporate M&A activities. By end-2012,
official statistics suggested that Chinese companies had invested USD 503bn
overseas and is likely an underestimation of actual flows. At some point soon,
possibly later in 2013, China's overseas direct investment (ODI) will exceed inward
foreign direct investment. The new offshore Renminbi market will facilitate this
movement. Renminbi-denominated ODI will gradually become a reality as offshore
liquidity improves. Indeed, ODI could well become a significant additional source of
offshore Renminbi. Growth in the offshore CNY bond and equity markets,
combined with significant capital-account liberalisation, will likely attract long-term
international capital to China.
Impact on investors
The value the Renminbi brings to foreign investors can be seen in the increasing
importance of the currency, if we examine the development of Luxembourg as an
offshore Renminbi centre. Luxembourg is the world's eighth-largest financial
investment centre and Europe's biggest fund-management centre. It had secured
deposits of CNY 20bn by January 2013, the highest in the euro area. Loans
extended in Luxembourg reached CNY 30bn, while local fund industries manage
assets of CNY 200bn. As the home of many UCITS, Luxembourg serves as a
central point for marketing funds across Europe, Asia, the Americas and the Middle
East – efficiently using one fund structure.
China’s domestic capital markets are now more accessible than ever, underscored
by accelerating quota approvals under the QFII and RQFII schemes. We expect
this process to continue to accelerate, mainly through enhancements to current
schemes such as allowing broader participation by foreign investors, wider access
to onshore products, and greater flexibility on repatriation. Value investors will
continue to be favoured, while cross-border capital flows of a speculative nature
are likely to remain tightly controlled.
We believe foreign investors’ holdings of onshore bonds may have exceeded the
entire outstanding offshore Renminbi bond market. We break this down as follows:
9 October 2013
9

Foreign investors have received CNY 475bn of interbank bond-market
investment quota as of end-2012

An additional CNY 100.8bn of QFII and RQFII quota was approved in the first
seven months of 2013.

The combined amount of CNY 576bn exceeds current outstanding Dim Sum –
or Chinese yuan-denominated – bonds/CDs, at CNY 512bn.
Understanding the possible future expansion of RQFII quotas outside of Hong
Kong to places such as Taiwan, London and Singapore is critical. For investors
with a Greater China strategy, the mutual recognition of funds between Hong Kong
and Mainland China could be a first step towards increasing distribution in the
mainland as well as abroad.
Central banks and sovereign wealth funds have already started buying Renminbi
assets. Some 16 institutions – including the central banks of Hong Kong, Macau,
Malaysia, Singapore, Thailand, India, Indonesia and Korea – are operating on the
onshore China Foreign Exchange Trading System (CFETS) through quotas
granted by the PBoC. Assets held by these institutions currently take three main
forms: CNH bonds, CNH deposits and onshore CNY bonds. We estimate that the
combined total brought some CNY 300-350bn into the onshore bond market by
mid-2013. Over time, we expect the PBoC to increase the quotas offered to these
institutions, and open up the quota system to long-term institutional investors.
Central banks, in addition to acting as investors, are now able to provide Renminbi
liquidity to local banks and corporates at onshore costs, thanks to their bilateral
swap agreements with the PBoC. Hong Kong and Singapore have implemented
offshore Renminbi liquidity facilities allowing offshore banks to tap onshore
Renminbi liquidity at prevailing onshore interest rates. As of August, the PBoC has
signed bilateral swap lines worth a total of CNY 2.2tn with 21 countries and regions.
However, these facilities have been thinly utilised so far – foreign central banks
used only CNY 9.3bn in H1-2013.
Offshore Renminbi centres can concentrate offshore Renminbi funds in their own
markets and neighbouring regions. We believe central banks have an opportunity
to be key to the development of the Renminbi. Over time, different hubs will
develop different focus areas and specialisations such as foreign-exchange trading,
primary and secondary securities markets, derivative products, retail and
commercial banking services and trade facilitation services.
Conclusion
Supported by the increasing dominance of China’s economy – both through its size
and continuous growth, the political will of the new Chinese leaders, and deepening
financial markets, the advent of the Renminbi as a global currency is an irreversible
trend. The fast-changing regulatory landscape constantly opens new opportunities
which could add benefits to your business. The Renminbi should form an integral
part of your China strategy and is an area that requires special attention, resources
and even investment to make sure you are ahead of the curve. While it requires
immediate action, it is also something to embark on as a long-term journey and an
on-going agenda. "Do you Renminbi"? should not be just a question of ‘Yes’ or ‘No’,
but ‘How’? If you do it right and can act nimbly upon regulatory relaxation, you can
definitely make the CNY one of your competitive advantages.
9 October 2013
10
Disclaimer
RMB products denominated and settled in RMB deliverable outside the Mainland of China is different from that of RMB deliverable in the Mainland of China as RMB is
currently not freely convertible.
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SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES;
OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO
WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY
REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR
EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS.
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