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Window of opportunity to expand yuan's exposure
March 21, 2012, Wednesday
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Print Edition
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THE issue of sovereign debt in Europe and the United States has provided a historic opportunity for further globalization of the yuan.
Since the trial program for yuan settlement in cross-border trade started in July 2009, settlement volume has grown significantly. In 2011, it exceeded 2 trillion yuan (US$315 billion), and by the end of the year, there were more than 600 billion yuan in deposits in Hong Kong.
However, since the latter half of last year, the growth of yuan deposits in Hong Kong has been slowing and even shown signs of declining. Growth slowed to 55 percent from 402 percent in 2010.
There are mainly three reasons for the slowdown: (1) a decline in trade settlement due to slower exports, (2) decreased expectations for yuan appreciation among foreign investors, and (3) lack of attractive investment products and channels in the offshore yuan market.
To further enhance construction of the offshore yuan market and expand holdings of yuan assets offshore, I proposed the following five steps along with expanding trade yuan settlements and establishing more currency swaps with central banks.
1. Create various offshore yuan investment products and provide attractive investment opportunities for investors at all levels of risk-and-return appetite.
Since 2010, the Dim Sum bond market has grown rapidly. But signs are that the bond is losing favor among investors. Issuance in the latter half of last year dropped to 75 billion yuan from 83 billion yuan in the first six months.
The renminbi qualified institutional investors program received huge applause from the market when it was launched in the latter half of last year. The first 20 billion yuan quota was meted out in a week. This shows that new offshore yuan products are still popular among investors.
Given that, we should actively encourage regulators and financial institutions to invest in new products, such as yuan-denominated investment in overseas stock and commodities markets, including carbon-exchange products. These will not only enrich the menu for foreign investors but could also bring benefits for issuers in terms of risk management and accounting.
2. Encourage domestic companies to use yuan when they invest overseas, especially in businesses targeting markets in China.
Recipients of the money can convert the yuan to other currencies in the offshore market, or they could purchase equipment, raw materials and services from Chinese companies directly.
Secondly, because some European banks will need to replenish capital in the next one or two years, Chinese companies could buy stakes in some high quality financial institutions or guide these institutions to issue yuan-denominated bonds in the offshore yuan market to replenish capital.
3. Encourage domestic financial institutions to develop yuan-denominated financial products when providing funds for foreign companies. Countering the tight liquidity among banks globally, Chinese financial institutions should be the pilots of developing offshore yuan project and trade financing, especially in long-term offshore yuan-syndicated loans.
4. Use a suitable amount of yuan in aid programs involving governments or multilateral economic organizations. China can also consider inviting fund-thirsty sovereign states and international economic organizations to issue offshore yuan bonds in Hong Kong. Financial institutions could subscribe together with market investors.
5. When new international economic organizations are established, China should consider funding its share with yuan. China should introduce a financial corporation mechanism at an appropriate time in multilateral organizations, and consider funding with the yuan.
Fang Fang is also a member of the Chinese People's Political Consultative Conference. Opinions expressed here are his own.
Since the trial program for yuan settlement in cross-border trade started in July 2009, settlement volume has grown significantly. In 2011, it exceeded 2 trillion yuan (US$315 billion), and by the end of the year, there were more than 600 billion yuan in deposits in Hong Kong.
However, since the latter half of last year, the growth of yuan deposits in Hong Kong has been slowing and even shown signs of declining. Growth slowed to 55 percent from 402 percent in 2010.
There are mainly three reasons for the slowdown: (1) a decline in trade settlement due to slower exports, (2) decreased expectations for yuan appreciation among foreign investors, and (3) lack of attractive investment products and channels in the offshore yuan market.
To further enhance construction of the offshore yuan market and expand holdings of yuan assets offshore, I proposed the following five steps along with expanding trade yuan settlements and establishing more currency swaps with central banks.
1. Create various offshore yuan investment products and provide attractive investment opportunities for investors at all levels of risk-and-return appetite.
Since 2010, the Dim Sum bond market has grown rapidly. But signs are that the bond is losing favor among investors. Issuance in the latter half of last year dropped to 75 billion yuan from 83 billion yuan in the first six months.
The renminbi qualified institutional investors program received huge applause from the market when it was launched in the latter half of last year. The first 20 billion yuan quota was meted out in a week. This shows that new offshore yuan products are still popular among investors.
Given that, we should actively encourage regulators and financial institutions to invest in new products, such as yuan-denominated investment in overseas stock and commodities markets, including carbon-exchange products. These will not only enrich the menu for foreign investors but could also bring benefits for issuers in terms of risk management and accounting.
2. Encourage domestic companies to use yuan when they invest overseas, especially in businesses targeting markets in China.
Recipients of the money can convert the yuan to other currencies in the offshore market, or they could purchase equipment, raw materials and services from Chinese companies directly.
Secondly, because some European banks will need to replenish capital in the next one or two years, Chinese companies could buy stakes in some high quality financial institutions or guide these institutions to issue yuan-denominated bonds in the offshore yuan market to replenish capital.
3. Encourage domestic financial institutions to develop yuan-denominated financial products when providing funds for foreign companies. Countering the tight liquidity among banks globally, Chinese financial institutions should be the pilots of developing offshore yuan project and trade financing, especially in long-term offshore yuan-syndicated loans.
4. Use a suitable amount of yuan in aid programs involving governments or multilateral economic organizations. China can also consider inviting fund-thirsty sovereign states and international economic organizations to issue offshore yuan bonds in Hong Kong. Financial institutions could subscribe together with market investors.
5. When new international economic organizations are established, China should consider funding its share with yuan. China should introduce a financial corporation mechanism at an appropriate time in multilateral organizations, and consider funding with the yuan.
Fang Fang is also a member of the Chinese People's Political Consultative Conference. Opinions expressed here are his own.
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