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The A to Z of the

RMBWhat you need to know about China's currency

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The A to Z of the

RMBWhat you need to know about China's currency

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@2014 Week in China is published weekly by ChinTell Limited, a company based in Hong Kong. All rights reserved.

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The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong.Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting,creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in thesepublications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. Noresponsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.


Contents

Welcome Note 4

Section 1: What is the RMB? 6

Section 2: Why is it spreading? 16

Section 3: What’s the plan for it to become an international currency? 22

Section 4: Why is it being used more in global trade? 28

Section 5: How is it spreading as an investment currency? 38

Section 6: What’s next? Will it replace the dollar? 46

Section 7: Glossary 48

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The growth of the renminbi (RMB) is set to be a defining theme of the 21stcentury.

China is the world’s second largest economic power and the world’s numberone trading nation. As China’s economic power continues to grow, theimportance of the RMB for trade settlement, investment and funding willincrease.

The pace of the RMB’s development has been remarkable. Until five yearsago the RMB had virtually no exposure in the international markets. Paymentsbetween Chinese companies and their foreign partners were usually conductedin dollars or euros.

Today, the situation is very different. The RMB is increasingly part of normalday-to-day business for anyone trading with or investing in China.

Around 20% of China’s trade is now settled in RMB and HSBC estimates thatthis will rise to one-third by 2015. Investment flows are moving in and out ofChina as new channels open up, and in January 2014 the offshore market sawliquidity of RMB1.6 trillion.

According to the SWIFT payment agency, the RMB overtook the euro tobecome the number 2 trade currency in the world at the start of 2014. It alsoentered the ranks of the top ten payment currencies, up from 17th two yearspreviously.

Barriers to the RMB’s use for investment still exist, but a bold programme ofreform unveiled by China in November 2013 will help to break down theremaining obstacles to full currency convertibility. This journey is far fromstraightforward, but HSBC believes that the RMB is now poised to developfurther and faster than ever.

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Welcome

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The race to become the leading RMB offshore centre will only accelerate thisprocess. Roughly 70% of offshore RMB deposits are concentrated in HongKong, but investor interest in Europe continues to increase. London,Luxembourg, Paris and Frankfurt have all announced ambitious plans toaccommodate the growth of the RMB and to normalise its use as a currency oftrade and investment.

I strongly believe that all individuals and businesses with an interest in tradeand investment in China can benefit from learning more about the RMB. As theleading international bank for the RMB worldwide, HSBC is already helpingbusinesses and investors to seize the growing opportunities that the RMBrepresents. I hope that this guide will help you to become part of that story.

Stuart GulliverGroup Chief ExecutiveHSBC

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Introduction A to Z of the RMB

What is the RMB?

Can you recognise the redback?

Most of us know an American one-dollar bill when we see one: it’s green,with George Washington on one side and the Great Seal of the United Stateson the other. But how many people outside China can say that they know whatChinese currency looks like? This guide is designed to introduce a few of themost important things about China’s money as it becomes a more commonsight around the world.

Until recently the renminbi – it translates in Chinese as ‘people’s currency’– hardly circulated outside China, so there was little reason for many non-Chinese to know much about it. But those days are changing as the currencystarts out on an international journey that companies, investors and savers allneed to know more about. As a way of settling trade and as a means forinvesting or saving, the renminbi can no longer be ignored.

Start with the basics...

China’s money is denominated in six values from Rmb1 up to a maximum ofthe Rmb100 note (about $16 or €12.20, so not a very large amount for thehighest denomination bill).

Probably less surprisingly all the notes feature images of Mao Zedong, thefounding father of the People’s Republic, which first introduced the renminbiin 1949.

While the renminbi is the political term for the currency, the Chinesegenerally refer to it as the ‘yuan’ in everyday usage. This dates back to theChinese word for silver coins minted in the Spanish empire and used by foreignmerchants to pay for Chinese silk and porcelain.

Today in shops in China you will see prices quoted in yuan and renderedtypographically as ¥. But ¥ is also an identifier for the Japanese yen, which hasbeen better known internationally. So the renminbi is more often seen in shortform as RMB outside China or as CNY (Chinese yuan), especially in the financialmarkets.

To keep things simpler in the remainder of this booklet, we’ll call it the RMB.

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Global horizons

Is the surge in tourists from China an indicator for the likely spread of itscurrency? Millions of Chinese are already spending on holidays overseas, withmany of the visitors welcomed excitedly by retailers like Harrods in London,Les Galeries Lafayette in Paris and Tiffany & Co in New York. About 100 millionoverseas trips were made by the Chinese last year and the year before theyovertook the Germans and the Americans as tourist spenders. Of course, mostof these overseas visitors will ‘think’ in RMB when they are spending moneyon their holidays. Here’s a quick calculation of the cost of a few items on awhistle-stop world tour, converted back into China’s currency.

Note: prices in RMB as converted on Feb 26, 2014

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Rmb8,496 Rmb208 Rmb411

Rmb115 Rmb122 Rmb193


Leading the way in RMB.As a multiple award winner in RMB internationalisation, HSBC is at the forefront of RMB services to help connect your business to new opportunities. Established over 140 years ago, HSBC looks after millions of customers in over 50 countries and territories, ready to serve your business needs. Our global team of RMB experts has extensive cross-border RMB trade experience. We understand local trade policies and regulations and as a result, can help you capture the full potential of the RMB for greater success in international trade.A recent HSBC poll of Chinese companies estimated that 55% of Chinese companies would offer discounts of up to 5% for RMB denominated transactions*. Whatever your needs, talk to HSBC, the leading international bank for RMB.

A new global currency is emerging. Be part of it.

To find out more visit www.hsbc.com/rmb

* Base: 100 HSBC corporate companies from China; RMB users and non-users; May-June 2013

Issued in Hong Kong by The Hongkong and Shanghai Banking Corporation Limited with operations in Hong Kong and various jurisdictions through its affilliates.



Before the RMB

The Chinese as paper money pioneers…

The RMB may seem quite new to the world but the Chinese were way ahead ofthe rest of us in introducing the first paper currency.The origins of bank notes date back to a kind of paper credit introduced by

Tang Dynasty merchants about 1200 years ago as an alternative to heavystrings of copper coins, which were a nuisance to carry around. But four centuries later paper money began to circulate more widely in

China under the Mongol emperor Kublai Khan, who was much admired by thetraveller Marco Polo for discovering “the secret of the alchemists” by mintingan imperial currency from the bark of mulberry trees. Kublai tried to terrify his subjects into accepting the new notes. “Nobody,

however important he may think himself, dares to refuse them on pain ofdeath,” Polo recorded. He took news of China’s money home with him but itwasn’t until the 1660s that bank notes were issued in Europe, more than 500years after the Chinese had first started using them.

Kublai Khan: dead serious about money

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Marco Polo: impressed by Kublai’s cash



HSBC and its history with Chinese money...

HSBC is now introducing the RMB to its customers around the world. But ithas a long heritage of working with earlier types of currency inside China.Below, we’ve picked three different forms of Chinese money that the bankhas dealt with in the past.

A syceewas a shoe-shaped ingot of silver bullion and the preferred form ofpayment required by the Chinese government. That meant that syceescirculated widely even though the currency system lacked a unifying standardand was baffling to most Europeans. HSBC had to rely heavily on local expertscalled gong-gu to estimate what a sycee was worth (values were calculated intotaels or ounces in English, or liang in Chinese). There were logistical challengesin lending sycee to customers as well. Recovering a loan from a Chinese generalin 1890, HSBC’s Shanghai branch had to employ seven labourers just totransport the weight of sycee owed on the debt. Large quantities of silver alsohad to be stored safely, so the bank’s vault in Shanghai was capable of holding1,350 tonnes of bullion. Even that sometimes wasn’t enough, so bank officialsmust have been relieved when the Chinese government called a halt to syceeusage in 1933.

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Sycee: silver bullion, stamped with gong-gu approval

Photo Credit: HSBC



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Photo Credit : HSBC

Easier to deal with than sycee, as far as most bank managers were concerned,was silver coinage. Unfortunately, there were a number of different types ofcoin, although the most desired was the Spanish silver dollar from which theterm yuan originates. Made from silver mined in central and south America,silver dollars were used by foreign merchants to pay Chinese traders for goods.They passed into wider circulation in the Chinese economy, mostly in coastalareas and especially in the south. More practical than bullion, the coinage wasused as late as 1913 before it was replaced by paper money.

A Spanish dollar: note the prominent ‘8’, as in the expression “pieces of eight”



A dollar note from Amoy (today, Xiamen) from 1886

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Photo Credit: HSBC

The lack of a single monetary authority in China led many banks to beginissuing their own notes towards the end of the 19th century. Again there was abewildering variety in circulation, some backed by tael and others by differenttypes of silver dollar. HSBC issued paper currency itself from a variety of TreatyPorts, with the notes appearing under the city’s name. Some were denominatedas dollars “or its equivalent in the Currency of the Port”.*

A one tael note from Shanghai A fifty dollar note from Peking (today, Beijing)



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Photo Credit: HSBC

* Source for information on Chinese currencies: HSBC archivists, plus Money in the Bank: The Hongkong Bank Money Collection, by Joe Cribb, 1987.

HSBC VIEWS

How many different types of Chinese currency does the HSBC archivecontain?

Helen: We have a good collection of a variety of the currency types thatcirculated in China, ranging from cowrie shells to tea-money through to modernpaper currency. It offers an extensive record of the many forms of Chinesecurrency used by HSBC over its history. The collection and the history of the bankgenerates a lot of interest, which will increase in the lead-up to HSBC’s 150thanniversary next year, when we will be celebrating our banking and tradingheritage. n

Helen SwinnertonSenior ArchivesManager

An HSBC clerk in Shanghai in 1921, when shoe-shaped sycee were still being stored


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Loading up: China’s annual trade in goods has passed $4 trillion

Rise of the Redback A to Z of the RMB

Why is the RMB spreading?

“When out of doors, never show your silver” is a Chinese proverb, urgingcaution in showing money to others. For more than 60 years China has beenreluctant to let its currency be seen much outside its borders. So why are morepeople around the world starting to use the RMB today? We outline three ofthe main reasons below.

China is playing catch-up“Frankly speaking, we haven’t got a lot of things for export apart from someapples, peanuts, pig bristles and soybeans.” Mao Zedong’s 1950s sales pitch toIndonesian president Sukarno sounds more like an apology but today Chinacan boast a lot more than a few shipments of nuts and pig hair. Between 1980and 2012 its share of world trade in goods and services rose from 1% to 12%. Nowthe world’s largest exporter and the second biggest economy after the US, ithas become such a major part of international trade and finance that it doesn’tmake sense for its currency to stay hidden. The rise of the RMB has been madepossible by what HSBC analysts describe as the “gravitational pull” of China’sgigantic economy.

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Photo Credit: Reuters



China doesn’t want to be trapped in a “dollar world”

Another explanation for the RMB’s rise goes back to the credit crunch. Asfinancial panic spread, banks were reluctant to lend so credit dried up. ForChinese companies accustomed to buying or selling goods with the UScurrency, business came to a standstill. In emergency mode, the People’s Bankof China (PBoC) stepped in to make the RMB available as an alternative throughcurrency swaps with central banks. This helped to get trade moving again andsince then the PBoC has signed swaps with more than 20 other countries formore than Rmb2.2 trillion in currency commitments.

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HSBC VIEWS

Is signing a currency swap the same as holding the currency?

Candy Ho: No, it’s a commitment to make the liquidity available if certaincriteria are met. The best way to think about China’s swaps is ascontingency facilities for the other country to access RMB funding ifrequired. This makes it easier for the other country to buy into RMB-denominated assets or to meet trade commitments in the Chinesecurrency.

How about sovereign reserves? Are other countries switching moreof their reserves into RMB? Is it the same as buying the RMB for asavings account?

It’s difficult to quantify directly as reserve managers are cautious aboutrevealing their investment strategies. But the RMB is mentionedincreasingly in the conversations that we have with the central banksand we are seeing more evidence of financial flows into RMB-denominated assets. But it's not the same as a central bank just buyingChinese currency and keeping it on account. Instead governmentsaround the world are accumulating assets denominated in RMB, whichwe can see anecdotally in announcements about investments like RMBbonds inside China or dim sum bonds denominated in RMB but soldoffshore in places like Hong Kong (see page 43).

Candy HoHead of RMBBusinessDevelopment for Asia-Pacific



China also hopes to see the RMB feature more in the sovereign reserves ofother countries. Beijing has at least $3.8 trillion worth of foreign reserves itselfand although no one is supposed to know how they are held (it’s a state secret)the guess is that as much as 65% of the total is in US dollars.

This creates huge problems if there are major falls in the dollar’s value(something that the Chinese have worried about as Washington racks updeficits and pursues monetary easing) because it would mean a huge capitalloss in Beijing’s reserves too.

Instead it hopes that global dependence on the dollar as a store of valuemight be reduced if more central banks shifted some of their savings into othercurrencies, including the RMB. African countries like Nigeria, Tanzania, Angolaand South Africa were the first to start talking about it and the PBoC haspredicted that 20% of Africa's foreign reserves will be RMB-denominated soon.But it isn’t just the Africans thinking about it. Australia has said that it willinvest 5% of its reserves in China’s sovereign bonds, for instance, and centralbanks in Japan, South Korea, Thailand and Saudi Arabia have all mentionedplans to diversify more of their own reserves into yuan.

China has new confidence

A third factor in the rise of China’s currency is national psychology: the Chineseare showing a more expansive mood. The theme crops up in different places,including the millions of new tourists with the financial means to traveloverseas for the first time. But there are signs of it in the sporting world too,

China doesn’t want to be in thrall to a world economy dominated by the dollar

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with stars like Li Na, the tennis player, winning the French and AustralianOpens, while Guan Tianlang, the 14 year-old golfer, played incredibly at his firstMasters tournament in the United States last year.

Elsewhere it’s evident in the spread of Chinese brands like Lenovo andHuawei, the aspirations of some of China’s largest companies to buy theirglobal rivals, and the determination of Shanghai to become an internationalfinancial centre.

The same trend is visible too in the more assertive mood of Chinesepolicymakers, who want more of a say at international conferences or moreseats on the boards of multilateral institutions like the IMF.

The push for wider acceptance of the RMB fits the same agenda. In the pastChina kept to the dictum of former leader Deng Xiaoping that it should “hideits brightness and cherish obscurity”. But the expectation is changing. Thanksto its ‘going out’ strategy China is becoming more engaged with the rest of theworld and that includes promoting its currency.

This change of mindset is less of a surprise if we consider China’s longerhistory. For more than two millennia Chinese influence in the worlds ofculture, commerce and technology was vast, spreading far across Asia andbeyond until an abrupt collapse of its authority in the face of European empirebuilders at the turn of the 20th century. A century later China has huge globalinfluence once again. Or as the veteran American diplomat Henry Kissingerput it in his book On China: “China does not see itself as a rising, but areturning power… It does not view the prospect of a strong China exercisinginfluence…as an unnatural challenge to world order – but rather a return to anormal state of affairs.” n

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Li Na: first Chinese to win a tennis major, the French Open in 2011



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The redback is rising around the world

Belarus: the unlikely pioneer.Belarus accounts for less than 0.1%of China’s trade but was the firstcentral bank outside Asia to sign aswap with the People’s Bank ofChina (worth Rmb20 billion) inMarch 2009.

The UK: gateway to Europe.HSBC issued the UK’s first RMBbond in 2012 and there’s $2.5billion of RMB spot trading in forexevery day in London. London alsohas Rmb14.5 billion in bankdeposits and the Bank of Englandhas a swap agreement worthRmb200 billion with the PBoC. Aseries of R-QFII ETFs were alsolaunched in London in January.

United Arab Emirates: regionalhub for the Middle East. SignedRmb35 billion currency swapagreement with Beijing two yearsago. As major commodity providersto China and potential investors inChinese assets, other Middle Easterncountries are expected to conductmore business with RMB too. Tradebetween China and 16 of the largestArab states grew from $13.5 billionin 2001 to $182 billion in 2011.

Nigeria: sovereign saver.Bought RMB bonds in ChinaDevelopment Bank worth$500m for its reserves in 2011and said in January that it plansto increase holdings of the RMBto 7% of its reserves from 2%currently. Five other centralbanks in Africa either hold theRMB or say that they have plansto hold it in their sovereignreserves.



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Australia: China as its leadingcustomer. Signed a Rmb200 billionswap two years ago and announceda plan last year to invest 5% of itssovereign reserves in Chinesegovernment bonds. Exports to Chinapassed A$90 billion last year.

Hong Kong: where it all started. The first mover in enabling personal bankaccounts in RMB in 2004, with Rmb861 billion ($142 billion) of deposits at theend of January this year; also the largest trade facilitator with Rmb219 billion oftrade settled monthly through Hong Kong’s banks in 2012; and the biggestinvestment platform for the RMB offshore, with HSBC forecasting as much asRmb570 billion of dim sum bond issuance in the city this year.

Taiwan: the latest to the party but primed to catch up fast. In theten months after RMB business kicked off on the island last year,deposits surpassed Rmb180 billion.

Singapore: launch pad forSoutheast Asia and privatebanking. Doubled its swapagreement with China toRmb300 billion ($48 billion) lastyear; HSBC issued the first RMBbond in the Singapore marketlast May; and more than Rmb160billion was deposited locally byNovember last year.

Shanghai: ready for reform? Shanghai has launched a new free trade zoneexpected to serve as a test bed for RMB reforms. If they work in the FTZ,they will be extended more widely. Qianhai, another pilot zone near HongKong, says also that cross-border loans in yuan reached Rmb15 billion in itsown pilot programme last year, according to the Chinese press.


The Plan A to Z of the RMB

What’s the plan to make the RMB a global currency?

What most people mean when they talk about the ‘internationalisation’ of theChinese currency is the process by which the RMB starts to circulate widelyoutside China as nonresidents use it for payments and investments or hold itin their bank accounts.

The first steps in this journey were taken at the end of 2003 when banks inHong Kong were allowed to accept RMB retail deposits in small amounts. Butthe pace picked up a few years later when a more aggressive blueprint waslaunched.

This plan for the spread of the RMB overseas envisages three main steps:first it becomes a currency used for global trade; then it takes on a role as acurrency for global investment; and finally it achieves a global reputation nottoo different to the US dollar, enjoying a status as a ‘reserve’ currency with

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savers, financial institutions and central banks around the world.Have things gone to plan since then? Phase one is well-advanced. Cross-

border business paid for with RMB ballooned from almost nothing five yearsago to about 25% of China’s trade in goods last year. HSBC is forecasting that athird will be settled in RMB by the end of 2015. So about $2 trillion worth ofcross-border commerce will be transacted in yuan, easily enough to see itbecome the third largest trade currency after the dollar and the euro.

These trends mean that foreign firms are getting more familiar with usingthe RMB for buying and selling goods. So now the second phase of the planneeds to take shape: providing new options for investing the deepening poolsof currency accumulating outside China (or ‘offshore’ in financial parlance).Conceptually, international firms are less likely to want to be paid with RMB ifthey can’t do much with it once it’s in their bank accounts. And if foreign firmsare put off from invoicing in the RMB, they won’t be as prepared to pay Chinesevendors with it.

Fortunately, the RMB is beginning to become more of an investment optionoutside China (see page 38 for a summary of how this is taking shape). That

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Credit: HSBC Research

2017 The year by which HSBCexpects the RMB will become fully convertible

July 2009 RMB trade settlement pilot scheme kicks off in five Chinese cities with Hong Kong, Macau and ASEAN traders June 2010 expansion of pilot cities and provinces to 20 August 2011 trade settlement scheme goes nationwide

2007 Mainland financial institutions issue RMB ‘dim sum’ bonds in Hong Kong July 2010 Dim sum issuance widens to Chinese and foreign companies August 2010 Beijing opened up its onshore RMB bond market to foreign central banks January 2011 rules published for RMB outward investment (ODI)July 2012 investors given quota to

September 2011 Nigeria announces plans to invest 10% of its foreign exchange reserves into RMB 2013 Taiwan and Singaporeapproved for clearing bank status

Trade settlement in RMB builds pools of liquidity worldwide

Investment and savings options make the RMB more attractive

Reserve usage signals ‘arrival’ of RMB as a world currency

The three-step process

A Global Trade Currency 1 A Global

Investment Currency A Global Reserve Currency 2 3

invest in onshore interbank bonds


leaves the final stage of the plan in which it is unveiled as an internationalcurrency. Some of the critics of China’s blueprint say that the RMB will struggleto become as international as the dollar because there are too many restrictionson how it can be used, especially in how investment is allowed to flow in andout of China. But others are more optimistic, noting that controls are beingloosened. HSBC expects the RMB to become convertible within five years,although some capital controls are likely to remain. It says that the goal is amuch freer RMB in a context in which regulators can maintain policysafeguards that protect domestic financial stability.

Change can happen fast and history suggests that the pecking order forcurrencies can transform more quickly than you might imagine. The largemajority of international trade was priced in sterling, the British currency, inthe late 19th century. As late as 1914, sterling also dominated as a globalinvestment currency and as the overwhelming choice for foreign bankingreserves. But as America’s economy surged (and Britain struggled to recoverfrom the financial damage inflicted by the First World War) New York and thedollar started to overtake London and the pound as the preferred choice intrade finance. New investment options began opening up as central banksstarted switching their currency reserves into the dollar too. By the late 1920s,it was on its way to toppling the pound.

Of course, there are plenty of differences to China’s situation today. But thereare enough parallels with the dollar’s experience to suggest that Shanghaicould start to become a new financial capital in the years ahead, just as NewYork once challenged London.

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21st century: Shanghai

20th century: New York

19th century: London

The world’s next financial hub?


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HSBC VIEWS

How is the RMB story developing?

Candy Ho: Two years ago many of the questions that we were gettingfrom clients were about how they should be using the RMB for tradesettlement. But that process is maturing and the reforms are now widelyunderstood. Our customers seem much more comfortable with using theRMB for trading in goods or services. Instead, more clients are asking usabout their investment options and what they can do with the RMB thatthey are holding on account.

Which new investment options are emerging?One of the main developments is the RQFII scheme, which is now startingto attract a wider range of qualified foreign investors. RQFII differs fromthe initial QFII investment programme in that the investment flow isdenominated in the RMB and not in dollars. But there are other importantdifferences, especially greater flexibility in asset allocation under RQFIIacross Chinese equities and fixed income.

The geographical reach for RQFII is widening as well, with new quotasestablished for investors in London and in Singapore. Taiwan is also saidto be in the final stages of announcing its own arrangements with thefinancial authorities in mainland China.

In January 2014, Ashmore Group, a UK asset management company, wasthe first London-based entity granted an RQFII licence to enter China'sdomestic securities market by the China Securities RegulatoryCommission (CSRC). HSBC acted as Ashmore Group's onshore custodianbank in China and facilitated the application. The CSOP Source FTSEChina A50 UCITS ETF was also listed in London in January usinginvestment quota approved under the RQFII pilot scheme in Hong Kong.HSBC was the custodian bank for this fund.

What are the other signs of the RMB spreading?China’s currency is still in the early stages of its international journey.What you have to remember is that there is probably about Rmb4 trillionin Chinese currency outside China at the moment if bank deposits, bondsand currency swaps are all factored in. And although this total is growing,it’s still only a fraction of the Rmb110.7 trillion of broad M2 money supplythat was circulating inside China at the end of December last year. Sothere’s plenty of liquidity available and more countries will start to seeevidence of the RMB spreading.

Candy HoHead of RMBBusinessDevelopment for Asia-Pacific


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Of course, up to this point Hong Kong has played a crucial role inshowing how the RMB can be used outside China. But it simply won’t beable to absorb all of the outbound flow and more countries will start toparticipate in the process. We are already seeing wider interest from arange of other markets in Europe, Africa and the Middle East.

How about in China: is the Shanghai Free Trade Zone going to beimportant?It’s another significant development. I think the FTZ should be regardedas a pilot project with comparisons to the early stages of the tradesettlement programme that started five years ago, which was trialled in afew cities first and then widened once it proved beneficial. We think therewill be a similar process for RMB reforms in Shanghai, with similarprogress on cross-border capital flows serving as one of the criteria inmeasuring the zone’s success.

One obvious example is new cash pooling arrangements in whichcompanies can sweep up their surplus cash around China and channel itoverseas through the FTZ. Of course, this helps firms to manage cashbetter on a global basis. But the way that the policy has been introducedis also revealing as regulators have set overall guidelines but largely leftthe operational arrangements to the banks and their clients. In thisrespect, China is adopting a more open, international approach ratherthan insisting on case-by-case approvals as it often did in the past.

It’s another sign of the internationalisation process that should helpShanghai to develop as much more of a regional treasury centre. Thatwill directly benefit the spread of the RMB too. n

A Trading Currency A to Z of the RMB

The RMB and global trade

Trying to explain how China would negotiate its way through the economicreforms of the early 1980s, Deng Xiaoping opted for a piece of homespun

wisdom. “Crossing the river by feeling for the stones” is now remembered asone of his best-known sayings, even though he borrowed it from Chen Yun, amore conservative colleague (there isn’t much convincing evidence that Dengcoined the even-more-famous “to get rich is glorious”, either).

Despite its misunderstood origins, the “crossing the river” strategy isinvoked repeatedly in China, implying ‘learning by doing’ in which reform istrialled in pilot programmes and then extended more widely if it turns outsuccessful.

For the RMB, the process has been no different, with one particularlyimportant step coming in April 2009: the announcement that a small groupof companies from Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguanwould be allowed to settle cross-border trade in RMB. Just a few weeks later,

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Deng Xiaoping urged caution internationally


the first deals were concluded when six Shanghai firms signed contracts withcounterparties in Hong Kong.

It hardly sounds like a groundbreaking move – allowing the two sides in atrade to use the Chinese currency for payment. But it was revolutionary in itsown way because the RMB hadn’t been an option in paying for cross-bordertrade previously. The large majority of such business was conducted in euros orwith US dollars.

In fact, the commerce paid for that day was limited too, with the first batchof deals worth less than Rmb14 million. But the state media was still excited,reporting that at least 365 Chinese companies had won approvals to transact inRMB for cross-border business. Their prediction was that there was hugepotential for change once more firms began to participate. And so it has turnedout, with much faster growth in the share of trade paid for with RMB than mostpeople had expected.

That was helped by a major expansion of the scheme the following year,when it was extended to a wider range of firms in 20 provinces. There wasanother huge step forward in 2011 when the scheme was made available todesignated companies in all provinces and in early 2012 trade settlement inRMB went universal, when the right was granted to all.

Going back to Deng’s maxim, the river has been crossed in leaps and bounds:from the first Rmb14 million of cross-border commerce in 2009 to Rmb4.6trillion last year. Trade settlement in yuan accounted for 18% of China's totaltrade in 2013, compared with just 2% in 2010. HSBC expects 30% of China’strade to be settled with RMB by 2015, with the share of trade in Chinesecurrency with emerging markets much higher at 50%.

Why is paying for trade with RMB so important?The blueprint for how China’s leaders want their currency to spread wasdiscussed briefly on page 23, including the hope that payment for internationaltrade won’t be as dependent on the US dollar as in the past. With more RMBcirculating outside China, there should also be more demand to invest with it.Hence the push to encourage more traders to consider the RMB as a payment

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currency will result in it becoming more of a choice for investors too.But what’s driving the trend? For Chinese firms, one of the clearest benefits

is the chance to avoid some of the transaction costs and hedging expensesassociated with having to buy and sell goods with other currencies (i.e. takingpayment from an international client in dollars and then having to convert thecash back into RMB). If the Chinese supplier takes payment in RMB, these costsare no longer incurred. So buyers of Chinese goods can then request lowerpricing or better trade terms by offering to pay in the domestic currency.

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Workshop of the world



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HSBC VIEWS

Why should international firms be ready to use the renminbi intrade?

Simon Constantinides: The surveys that we have conducted suggestthat exporters from China are prepared to give a discount as high as 5%if the buyer is prepared to pay in the Chinese currency. Take a typicalcompany in China striking a deal with an international buyer in which itexpects to be paid in six months. If it prices the deal in US dollars, it hasgot to think about where the dollar is going to be against the renminbi insix months’ time. Usually that means that the vendor will factor in somekind of premium to cover the exchange rate risk. I call this the “hedgefactor” and Chinese companies are very good at building in additionalmargin on this basis. But if the firm invoices in renminbi it takes thiscurrency risk out of the equation. Buyers with a good sense of the coststhat go into producing the goods they are purchasing then have a newopportunity to push for lower prices with the vendor. It gives them moregrounds for negotiation.

What reasons do you hear from international firms who haven’tsettled trade using the renminbi yet?

One response is that their accounting systems can’t handle renminbipayments. Others tell us “we just deal in dollars, we want to keep itsimple”, especially those with thin margins, who say they can’t take therisk of currency volatility, which might wipe out their profits.

Admittedly, the whole idea of using the renminbi is still new to mostpeople outside China. For instance, if you are an Indonesian firm tradingwith a Chinese partner, you will probably have a history of transactingexclusively with dollars. If that is going to change there are variousquestions to resolve like: “Does my supplier know how to invoice me inrenminbi?”; “What do I need to do to get Chinese currency to make apayment into China?”; and “If I take payment in renminbi, how do Imanage my exposure?”

SimonConstantinidesRegional Head ofGlobal Trade andReceivables Financefor Asia-Pacific


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Client experience

Buying and selling with the RMBWeek in China talked to two of HSBC’s clients about how they are using the RMB as part of theirnormal commercial routine.

First we met Dmitry Barkov, who heads up corporate finance and business development in Asia forSportmaster Group, a sporting apparel and equipment retailer with more than a thousand stores inRussia and a growing presence in other markets. Sportmaster was also one of the first movers inpaying its Chinese suppliers with their own currency.

So Sportmaster was a pioneer in using the RMB?

We opened the first renminbi account in Russia in April 2010. We had two main goals. Firstly, wewanted to get rid of some of the dollars in our trade payments to reduce our currency risk. This wasprompted by the financial turmoil after Lehman Brothers collapsed. We feared the dollar was goingto get weaker, so we wanted to be able to pay for trade in a wider range of currencies. Secondly,we had the expectation that we could get better deals from our Chinese suppliers by taking onmore of the exchange risk on the RMB ourselves.

Our fundamental challenge is that about 90% of our income is derived in the Russian rouble but wehave traditionally bought about 80% of our goods from about 400 Chinese manufacturers, payingwith US dollars.

So we started to look at how we could reduce the risks and costs of double currency conversion bygoing straight from the rouble into the RMB instead. We joined the pilot project with the People’s Bankof China so Sportmaster was involved with RMB internationalisation right from the start.

How successful have you been in using it for payment?Our main battle is with human nature! We had to start by campaigning with our own staff members,who were very attuned to working with dollars. There was reluctance among my sourcingcolleagues to change how they do business so we had to put time and effort into persuading themto move towards the new mindset. This is very important as the process is about more than askingthe Chinese to let us pay them with RMB. We also have to get them to reduce their prices! Oursourcing teams have to talk to every factory boss, outlining first how the supplier will save moneyon FX risk before then trying to negotiate the lower prices.

But our initial experience is that there can be real resistance from suppliers. Many of them don’twant to be paid with RMB!


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Sportmaster’s Dmitry Barkov is a Russian pioneer of greater RMB usage

Photo Credit: Aylwin Lek


So it can be a struggle to convince them?

Yes, at first most of them want to stick with the dollar. And even when we can persuade them tochange, many simply take their dollar price list and recalculate it back into Chinese currency at theprevailing exchange rate.

But that’s not what we want. Factories are adding a percentage to their prices for transacting inforeign currencies and this is the part of the price that we are pushing them to reduce.

Part of the problem is that many of these factories are competing with producers in places likeBangladesh and Indonesia, where contract prices are quoted in dollars as a standard. So suppliersdon’t see why they should change their procedures just for us. But we do have chances to influencethem if our order is big enough or if the client is desperate to win our business. In these cases, theyare more willing to look at how their costs may come down if they invoice in their own currency.

What kind of savings are you talking about?

In our experience they might reduce their prices by 2-4%. But if the order is a huge one or theproduction cycle is longer than average – say more than six months – some of the discounts ondollar pricing can be better, perhaps as high as 8%.

So far about 10% of our supplier base in China is invoicing in RMB but this year we are requiringthem to provide pricing quotations in both the Chinese currency and the dollar. Our sourcing teamswill then pick their preferred option. I hope that this will help us get about half of our payments toChina denominated in RMB within two years.

Week in China then spoke to Corlette Design, an Australian design and brand developmentspecialist headquartered in Sydney. It provided another angle on using the RMB: how billing in itcan make a difference in winning and retaining customers.

The company’s founder Michael Corlette told us more.

How has Corlette started using the RMB?

We are quoting and billing for our services with it in China, having switched our invoicing fromUS dollars.

We specialise in signage and branding for high-end hotels, although we’re getting business inmixed-used developments for projects that combine hotels, offices and apartments. These includedevelopments anchored by international hotel brands that are operated by Chinese state-ownedfirms or high net worth individuals.

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Michael Corlette says that invoicing in RMB helps to win business in China

Photo Credit: Nikki Hiltonk


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And what made you switch to RMB invoicing?

We started selling in China in 2010 and opened an office there two years ago. But as our businessgrew, we realised it was much easier for our clients to pay us with their own currency rather thanwith dollars, where there used to be a lot of paperwork.

There was hassle for us too, like limitations on the amounts that customers could pay us offshoreor processes in which both parties had to prove that the sale was legitimate.

So when HSBC suggested that we set up RMB invoicing inside China we moved pretty quickly. Ittook away all of those issues by making payment much simpler, as well as freeing our clients fromthe exchange rate risk of paying us in dollars. Our philosophy is to make things easier for our customers. The reasoning is straightforward – if it’sbetter for them, they’re more likely to do business with us.

Was it difficult to set up?

No, it wasn’t, although it probably helps that we are relatively small so it didn’t mean a majorupheaval for our business processes. Our pricing in China has stayed at the same levels too.

We have an RMB account in China and one in Sydney. Most of our Chinese customers pay us withlocal currency in China, although a few make payments to our Australian headquarters. Our headoffice then bills the Chinese subsidiary for design work completed in Australia and these paymentsare converted back to Australian dollars when they arrive in Sydney.

About 90% of our Chinese customers now pay us with RMB. As far as I am aware no one else in ourindustry was offering the same option when we started and we believe it has opened a lot of doorsfor us.

It demonstrates our commitment to working in the Chinese market and I think it has made adifference in winning clients.


An exchange of views – what is the yuan really worth?For long periods since 1949, international demand for the Chinese currency has been verylimited. But in the last few years that has begun to change and the RMB has steadilystrengthened to be more than a third stronger against the dollar since China began itsmost recent round of exchange rate reform nine years ago (when the central bankremoved the fixed peg and allowed a managed float around a daily reference rate).

On the eighth anniversary of the reform, the yuan was valued at 6.17 against the dollar.But that still hasn’t stopped rows about whether it is “fairly” valued. China’s critics insistthat Beijing manipulates the exchange rate to benefit its exporters, although the case isgetting harder to argue and some commentators believe that the RMB is close to fair-value status.

Despite this, there is domestic political pressure inthe United States for Washington to do more whenother countries can be shown to be manipulatingtheir currencies. China is often presented as a repeatoffender but the White House has refused to act formore than 20 years, usually because of concernsabout provoking trade conflict.

This has frustrated persistent critics of the Chinese,like Senator Charles Schumer, a New York Democrat,who has been pushing for new legislation to targetChina's currency, claiming that it will help to protectAmerican jobs. "That's why we're making a renewed,bipartisan push to get this bill passed and onto thePresident's desk, and sending a strong message to the Chinese government that therigged game must come to an end," Schumer told reporters last year.

In February this year the RMB saw its biggest decline against the dollar for years,prompting speculation that the Chinese were going back to a depreciation strategy onfears that the currency is getting too strong. But for others it was a case of the centralbank sending a message to currency traders that the RMB isn’t a one-way bet, followingmonths of ‘hot money’ inflows. Beijing has also insisted that the downward dip wasn’tunusual by international standards and showed that the RMB was becoming a moremarket-driven currency. “The yuan’s fluctuations are normal compared to volatility indeveloped and emerging market currencies,” claimed the foreign exchange regulator.“Don’t read too much into them.” n

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An Investment Currency A to Z of the RMB

Is the RMB becoming aninvestment currency?

Most of us know that the Great Wall was built to protect China’s emperors frombarbarian invaders. But the Chinese economy has long been defended byanother wall: a series of restrictions called ‘capital controls’ that limit howChinese nationals can send their money overseas and how foreign investorscan access Chinese assets.

China isn’t the only country that restricts how investment can cross itsborders. But it has been more vigilant then most in maintaining capital controls,partly to prevent “hot money” flowing in and out of its economy. Anotherreason is that its state-directed model of development has traditionally blockedforeigners from controlling key parts of the economy, and uses low-cost capitaltrapped inside China to fund economic growth.

But this growth model is starting to change and if the RMB is to complete itsinternational journey, most of these controls will need to be withdrawn so thatthe currency can move more freely between China and overseas (or “offshore”).

There are ways of understanding whether the RMB is making progresstowards this goal, by looking at how much of it is circulating outside China,and checking whether there are more options for people to invest with it.

The first indicator is offshore liquidity or the amount of RMB in circulation

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outside Chinese borders. The value of RMB in bank accounts outside China atthe end of last year was about Rmb1.2 trillion, with Rmb860 billion on depositin Hong Kong, another Rmb180 billion in Taiwan and Rmb140 billion inSingapore. That was twice the global total at the end of 2012, with places likeParis, London, Luxembourg and Macau also making contributions.

For now the lion’s share of RMB-related activity in trade and investment isconcentrated in Hong Kong, with Taiwan and Singapore beginning to play moreof a role in Asia. There’s also a race to grab pole position in Europe, whereLondon is in the lead but other contenders are vying to become the continent’sRMB hub (see below).

How about the second signpost – more choices for those wanting to invest

Zurich and Geneva: Switzerland has some of the longest-established diplomatic and commercial agreements with Chinaof any European country and also signed a major free tradeagreement last May. The Swiss are presenting themselves as acommodity hub, and likewise as a wealth and assetmanagement centre ideally positioned for Chinese clients.

The RMB race for Europe: London is ahead at the moment. But who is going to challenge?

Frankfurt: huge potential for services related to tradesettlement in RMB as Germany’s commercial ties with Chinaare greater than its European competitors (the pair conducted€144 billion of bilateral trade in 2012). Last October, the PBoCagreed a Rmb350 billion bilateral currency swap with theEuropean Central Bank, which is headquartered in Frankfurt.

Luxembourg: more than half of Chinese investment going into theEU is structured to enter through Luxembourg first. The Duchy isalso home to the European headquarters of three of China’sleading state-owned banks and leads its rivals in terms of Rmb56billion in deposits, Rmb67 billion in loans and more than Rmb228billion of assets in mutual funds.

Paris: nearly 10% of Sino-French trade is now settled in RMB andFrance is also trying to position itself as a gateway to Africa forChinese companies. The lobby group Paris Europlace says that thetotal value of RMB bonds issued offshore by French corporates in2011 and 2012 was nearly twice the amount sold by their Britishcounterparts.

their Chinese cash? Chinese companies have to apply for approvals to investoverseas and have traditionally used dollars to buy overseas assets. But rulechanges since 2011 have allowed more of this investment to be made withRMB. Rmb86 billion (or $14 billion) in non-financial sector investment

overseas was reported by Chinese firmsfor 2013 from a total of about $90 billion.This was triple the previous year andoutward flow is an area to watch asChinese firms are hungry to investabroad.

There are signs of more RMB-denominated investment coming into

China from overseas as regulators make it easier for investors too. If they alreadyhave approvals for investment in foreign currency, they no longer need to applyto do the same with RMB. Analysts also expect more international interest forportfolio investment (buying into assets like stocks and bonds, where access ismore restricted by the Chinese authorities). Currently, most of the investmentchannels use dollars via the Qualified Foreign Institutional Investors programme

(QFII). However, another programmelaunched in 2011 allows investors to putRMB into China’s stock and bond markets.At least Rmb91 billion was approved lastyear under the scheme, known as RQFII,with the available quota widened toRmb410 billion. The geographical scope ofinvestors is growing as well: firms fromSingapore and Taiwan have joined Hong

Kong with quota and the first UK-based investor received Chinese approvals inJanuary. French authorities say that financial firms in Paris may soon be grantedsimilar rights.

But probably the best-known investment option for the RMB are dim sum (orCNH) bonds. Dim sum are a popular meal in southern China served as a seriesof steamed or fried dumplings, rolls or buns. The culinary term has beenadopted in the financial world to describe a new type of bond that is issued andtraded outside China. Other bonds have been named in a stereotypical way too


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Outbound

Inbound


(it’s not hard to guess the currency inwhich Kangaroos, Maples and Samuraisare sold). In China there are Panda bondsand German carmaker Daimler was thefirst foreign, non-financial corporate toissue an RMB-denominated bond inChina's domestic market in March thisyear. But dim sum bonds have been a realsuccess outside China, attracting

widespread interest from issuers and investors since June 2007, when ChinaDevelopment Bank sold the first one (last year HSBC topped the rankings asbookrunner for 4o deals; see the interview on page 43 with Crystal Zhao formore on dim sum bonds).

The market really took off three years ago when banks, Chinesecorporations and multinationals like BP, Tesco, Volkswagen and McDonald’sstarted selling RMB bonds and HSBC expects issuance this year to grow to asmuch as Rmb570 billion, a new record. Companies have been keen on raisingcapital in RMB for their business operations in China, especially when itproves a cheaper option than selling bonds in dollars. Investor motivationsare evolving. Initially most were counting on the RMB appreciating againstother currencies over the duration of the bonds. Although most are stillhoping for currency gains, there is now more of a focus on the individualyields that the bonds pay too.

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Offshore

Dim sum delight: the real thing, rather than the burgeoning asset class


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A small selection of dim sum bonds in whichHSBC was Lead Manager on the deal

The World BankRmb1.7bn

TescoRmb725m

Volkswagen Rmb1bn

America MovilRmb1bn

Volvo Rmb1bn

Ford Rmb1bn

China EasternRmb2.2bn

Bank of ChinaRmb2.5bn

MitsuiRmb500m


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HSBC VIEWS

What’s the current state of the dim sum market?

Last year was the biggest ever for dim sum issuance at Rmb371 billion,up more than a third on 2013. We are also forecasting further increasesthis year with total issuance expected to be in the Rmb520-570 billionrange. We have already seen record highs for bonds and certificates ofdeposit (CDs) denominated in RMB in January and February at Rmb139billion or half of the total for last year.

Interestingly, there are signs of more diversified issuers like the Trade &Development Bank of Mongolia and the overseas subsidiaries of Chinesetechnology companies. But we also expect refinancing of dim sumsissued in previous years to be a major factor. Their maturities tend toaverage around three years, meaning that many of the bonds sold in2011 will need to be refinanced this year.

So dim sum tenors are very short?

They are the shortest of any Asian bonds, primarily because the marketis relatively new and investors are taking time to get confident aboutholding assets denominated in the Chinese currency over the longerterm. We are seeing some signs of longer-term paper, especially frombonds sold by policy banks and governments, which can be up to 30years in duration. Some multinationals have started to issue more 5-yearbonds too. But the average tenor is still at about 3 years.

Certificates of deposit are still prominent?

Yes, CDs are the biggest chunk of the new supply, making up about 70%of the total issuance in 2013. We think that bonds will start to eat intothis share, moving to something like 40% of the total by the end of theyear. But CDs are going to remain as favourites as they’re easier to issuethan bonds, which have to go through a more time-consumingsyndication process. Also CDs are normally issued over shorter tenors –some as brief as 3 months – which makes them popular with theChinese banks.

Crystal ZhaoAssociate, Fixed

Income Research


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Who else were big issuers in 2013?

One important landmark was the first issue of a dim sum bond by anoverseas government. British Columbia, a Canadian province with strongtrading and investment relationships with China, and home to manyChinese immigrants, sold a Rmb2.5 billion bond. Investors from theUnited States bought about 40% of the deal.

Elsewhere, multinational interest was a bit constrained by cheaperfinancing costs in the US dollar, which encouraged many banks andcorporations to issue dollar-denominated bonds. Still, there were somenotable names selling bonds in RMB like ICICI, the Indian bank; Total, theFrench energy group; SK Global Chemical, the Korean chemical producer;and BP, the oil and gas giant.

That sounds like quite a diverse group?

Yes, although it’s mostly high-grade names. But multinationals havecontinued to sell dim sums this year, including Volkswagen and Fonterra.The bonds are an excellent option for firms with operations in China whowant RMB for capital expenditure or working capital. Remember thatforeign companies have not been able to issue bonds in China themselvesuntil very recently when Mercedes-Benz was part of a pilot bond offering.So one of the best comparisons is between borrowing RMB onshore versusselling bonds outside China – and it’s generally cheaper to raise the fundsoffshore. Take the current yields on the 5-year Fonterra and VW bonds,which are 3.7% and 3.5% respectively. This is much cheaper than loans inChina, which normally charge 6% a year, although there can be a smalldiscount for good quality borrowers.

The regulators are also making it easier to invest RMB from offshoreinside China. From the start of this year, the documentation and approvalprocess for a foreign firm investing with RMB is exactly the same as if itwere making a US dollar investment.

This fundraising situation is similar for Chinese companies. For them, itcan be as much as 160 basis points cheaper to sell RMB bonds outsideChina than to do the same inside the country. Of course, they still needgovernment approvals to repatriate the capital to ensure that theproceeds are being used for capital expenditure or business operationsrather than going into areas like trust financing, property or derivatives.


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And what’s the main attraction for investors?

In general they are looking for better coupons (investment grade dimsums from foreign corporates offered about 120 basis points more yieldthan comparable bonds in US dollars in February, for example) plus thehope of further gains through capital appreciation of the RMB.

Despite this, HSBC is forecasting some headwinds for the market thisyear, especially if US Treasury rates go up, narrowing the differential onthe equivalent returns for RMB-denominated investment. The earlypurchasing managers indices in China this year have created someuncertainty about the direction of the economy, weakening demand forsome RMB assets, and the recent rout in the Chinese currency led bypolicy directive has warned the market that the RMB is not a one-waystory. So we are expecting average yields for dim sum bonds to risegradually as investors ask for more compensation amid the supplydeluge.

Does interest in dim sum continue to be concentrated in HongKong?

Mostly but other locations are getting more active as well. The UK is agood example, with two Chinese banks issuing dim sum bonds in Londonlast year. We expect to see more financial institutions selling RMB bondsthere this year too.

There’s also a lot of investor education going on, with Singapore andLondon both getting new access to Chinese stocks, bonds and moneymarket funds via the RFQII scheme. London investors now have Rmb80billion in new quota to invest in Chinese assets, for instance, and fournew exchange traded funds (ETFs) tracking A-share indices werelaunched between last December and this January.

This suggests that dim sum bonds will have to compete with a widerrange of investment options in future. But fortunately RMB depositsoffshore grew more quickly last year than in 2012 and they have beenhitting new highs in Hong Kong, Taiwan and Singapore. That means thatthere is a greater pool of RMB that needs to be invested too. n

The Future of the RMB A to Z of the RMB

What’s next for the RMB?

Whether the Chinese redback can ever surpass the American greenback isa popular debate among currency wonks. Certainly, the RMB is climb-

ing the rankings quickly. The data on global payments from SWIFT, a serviceprovider to banks and corporations, shows that it overtook 23 other currenciesin the last three years, taking 7th place in January bypassing the Swiss franc,with 1.39% of global payments.

That puts it some way back on the two leaders, the euro and the dollar, eachwith payment shares of more than 30%. Nonetheless, the RMB is growing muchfaster in payment terms than any other currency (payments in Januaryincreased by a little over 30%, much more than the average of a little under 5%)and HSBC expects the RMB to climb to number three in the payment rankingsrelatively quickly.

In other areas the dollar’s dominance is much more impressive. The FederalReserve has estimated that at least half of the dollar bills in existence circulateoutside the US, for example, while most of the world’s foreign exchangereserves continue to be dollar-denominated. At least 80% of forex transactionsare also classified as trades of other currencies for dollars.

If the RMB really is to become more of a rival to the dollar it will need to beused for transactions that aren’t related directly to China. And before that canhappen, China’s domestic financial markets need to become more robust, sothere is less need for capital controls to protect them from internationalcompetition. Currently, these barriers limit the RMB’s appeal.

Despite this, there’s little doubt that the Chinese currency is already goingglobal. It’s being used much more frequently as a means of paying for trade;there is much more of it sitting in bank accounts around the world, especiallyin Hong Kong; and there’s more evidence that it is becoming a factor in theinvestment world, especially in RMB-denominated bonds and forex trading.

But in the years ahead, rather than a heavyweight showdown between theRMB and the dollar, we may see the dawn of more of a multi-currency world inwhich the economies of countries like India, Brazil, South Korea and Indonesiaare also better represented. Hu Jintao, China’s former president, said the sametwo years ago when he suggested that a landscape dominated by a single

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The Future of the RMB A to Z of the RMB

currency – the dollar in this case –was a “product of the past”. Of course, Hu wasenvisaging more of a role for the RMB, even if he was cautious in forecastingwhen he thought it would become more of a rival to the dollar and the euro,admitting that it would be a “fairly long process”.

How long? The honest answer is that it depends on who you ask, as well howyou define the moment at which the RMB might be classed as genuinely‘global’. But if Chinese currency reform “crossing the river” style continues atthe rate of the last five years, the RMB’s progress could be rapid. HSBC has beenbullish in its own predictions, believing that reforms will pick up pace andmore of China’s onshore markets will open up to foreign capital. This feeds thevirtuous circle: the RMB is more widely accepted overseas for trade andpayments, fuelling further investment options. Then it begins to become muchmore of a feature as a store of value, including sovereign reserves.

“We are now more confident on our call that the redback will likely becomefully convertible within 5 years,” Qu Hongbin, Co-Head of Asian EconomicResearch and Chief China Economist for HSBC, forecasted last year. n

Face off: Benjamin Franklin or Mao Zedong?

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A to Z of the RMB

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The A to Z of the RMB

A brief glossary of some of the names, terms and descriptions in this bookletthat might also be heard in conversations about the RMB.

A AppreciationAn increase in a currency’s value in the foreign exchange markets. China’s currencyhas increased in value from a low of Rmb42,000 to the dollar in 1950 to Rmb6.12 inlate February 2014.

B BelarusThe first country outside Asia to sign a currency swap with the People's Bank ofChina, worth Rmb20 billion in 2009. China has since agreed similar arrangementswith more than 20 other central banks.

C Capital controlsMeasures that limit flows into and out of a country's capital account. China is oneof a number of countries to restrict the movement of investment capital across itsown borders, leading some analysts to warn that the barriers will have to bedismantled before the RMB can become a genuinely international currency.

D Dim sum bondsA bond denominated in RMB but issued outside mainland China. Dim sum bondsare attractive to investors wanting exposure to yuan-denominated assets but whoare restricted from investing in domestic Chinese debt. The term is derived from atype of Chinese cuisine that is especially popular in Hong Kong.

E ExportsChina reported that its exports rose 7.9% to $2.2 trillion last year and HSBC ispredicting that at least 30% of China’s trade with the rest of the world will beinvoiced in RMB by 2015.

F Floating exchange rateWhen a currency's value is allowed to fluctuate according to the foreign exchangemarket rather than fixed by a government. China sets a daily reference rate for theRMB’s value but has been widening the daily limit that the currency is permitted totrade on either side of the rate.

Glossary


Glossary A to Z of the RMB

G GreenbackAny note issued by the Federal Reserve in the US (the name is taken from the greenink used on the back of the notes). Many international newspapers are nowreferring to the RMB as the ‘redback’ in reference to its own colour.

H Hot money A term that refers to speculative capital flowing quickly from one country toanother to earn a profit on interest rate differences or anticipated changes inexchange rates. It’s one of the reasons that China maintains capital controls oncross-border movement of the RMB.

I International currenciesAn international currency is one that is used by companies and persons basedoutside the country of issue. International currencies fulfill three functions: theyare a means of payment, a unit of account and a store of value.

J Japanese yenJapan imported bronze coins from China for hundreds of years. The yen as a papercurrency was introduced in 1871 and today uses the same symbol as the RMB: ¥.

K Kangaroo bondsA type of foreign bond issued in the Australian market by non-Australian firms anddenominated in Australian currency. Like the dim sum currently being sold outsideChina, the bonds are mainly used to provide issuers with access to another capitalmarket outside of their own to raise capital. Also like dim sum they have been givena nickname that identifies the marketplace in which they are sold.

L Li Keqiang The current Premier of the People’s Republic of China. An economist by training, Liis a leading figure in the country’s economic policy.

M Mulberry moneyPaper money in circulation in China during the rule of the Mongol emperor KublaiKhan (1214-1294). As noted by the explorer Marco Polo in a chapter of his bookTravels called “How the Great Khan Causes the Bark of Trees, Made into SomethingLike Paper, to Pass for Money All Over His Country”.

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N Norwegian kroneOvertaken by the RMB (as was the Thai baht) in the SWIFT global payment currencyrankings for 2013. The RMB is now 7th in the currency tables, accounting for about1.39% of currency payments worldwide.

O OffshoreDescribing an institution or service that exists overseas. For the RMB it usuallydenotes products in the Chinese currency on offer outside mainland China (oftenin Hong Kong, which is why the RMB outside China is sometimes referred to as theCNH, with the ‘H’ signifying Hong Kong).

P Paper moneyBank notes or bills. The RMB was introduced by Mao Zedong’s government in 1949when he formed the People’s Republic of China.

Q QFIIThe Qualified Foreign Institutional Investor programme allows licenced foreigninvestors to buy and sell RMB-denominated shares on the Shanghai and Shenzhenstock exchanges. In 2011 Beijing followed up with the RQFII scheme (‘R’ stands forrenminbi) that allows investors to buy mainland stocks and bonds using offshoreRMB, with an initial quota of Rmb20 billion. Regulators have expanded the quotato Rmb410 billion.

R RenminbiChina’s currency. The primary unit of the renminbi is the yuan. One yuan issubdivided into 10 jiǎo, which is subdivided into 10 fēn.

S Sovereign reservesFinancial assets held by central banks in the form of reserves, often denominatedin foreign currency, plus gold. Normally held as a means of managing the risk ofshock or disruption in the foreign exchange market.

T Trade settlementThe exchange of money between a buyer and seller in a trade transaction.

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U UndervaluedCritics of China’s foreign exchange policies believe that the RMB has beendeliberately undervalued relative to other currencies to keep exports competitivelypriced. However, in recent years the RMB has strengthened notably against manycurrencies, leading others to claim it is close to “fair value”.

V VolkswagenOne of the early foreign corporates to issue a dim sum bond in Hong Kong in 2011.The German car manufacturer issued another dim sum in January this year.

W WenzhouA city in Zhejiang province that announced a trial programme allowing individualsto put RMB into overseas businesses and equity investments. Under current policy,the yuan cannot be directly sent to personal overseas accounts and Chineseindividuals may not send more than $50,000 overseas annually. According tosubsequent reports, Wenzhou may have jumped the gun with its announcementand the pilot progamme still awaits central government approval.

X (Deng) XiaopingThe architect of China’s economic miracle following the death of Mao Zedong. Dengserved as the country’s ‘paramount leader’ from 1978 to 1992. He died in 1997.

Y YuanThe base unit of the Chinese currency. Yuan in Chinese means a ‘round object’ or‘round coin’. During the Qing Dynasty, the yuan was a round and silver coin.

Z ZhuhaiA city in Guangdong province just across the border from the gambling enclave ofMacau. Zhuhai was also one of the first Special Economic Zones designated by DengXiaoping’s reformist government. n

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