RMB internationalization:

Transcription

1 RMB internationalization: Recent Development and headwinds Alicia Garcia-Herrero Chief Economist for Emerging Markets, BBVA

2 Key points 1 Why is China pushing to internationalize the RMB? 2 Recent development and headwinds? 3 Policy Suggestions 2

3 1. Why is China pushing to internationalize the RMB? Two possible and yet opposed - reasons: A. The external creditor/diversification story B. Net debtor story (longer term) 3

4 1. Why is China pushing to internationalize the RMB? A. China as huge external creditor International Investment Position 2010 (% of GDP) Source: BBVA Research and IMF China Japan Germany FDI Portfolio Derivatives Other Reserves Total 4

5 1. Why is China pushing to internationalize the RMB? With all its external wealth in foreign currency, diversification needed. Two ways 1. Diversifying the currency holdings away from USD and Euro too difficult 2. RENMINBISING China s foreign assets may be easier How much would be enough? Probably more similar to Japan than the US. About 12% of holdings of Japanese debt securities are in yen vs 90% for US ones in USD Still China has a long way to go: starting basically from 0%! 5

6 1. Why is China pushing to internationalize the RMB? B. China becoming a net debtor Why should China become a net debtor? 1. Aging and increasing pension/health costs 2. Potential costs of a bank bailout in the event of a hard landing (stemming from the accumulation on loans to LGFVs/developers/etc) China interested in accessing the exorbitant privilege of having a reserve currency to finance its growing debt 6

7 2. Recent development and headwinds From the pilot program to full coverage The trade value settled in RMB settlement increased rapid (0.04% of total trade value in 2009 to 8.9% in 2011) The international acceptance of RMB are on rise. RMB settled trades accounted for 8.9% of total trades in 2011 Source: HKMA, CEIC and BBVA Research RMB Bn 700 % 12 The geographical distribution of RMB settled trades Source: PBoC and BBVA Research Others 21.1% Macau 2.4% Japan 2.5% Taiw an 2.6% Singapore 7.7% Hong Kong 63.6% Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 Hong Kong Singapore Taiw an Japan Macau Others Value of RMB Settlement As % of total trade value 7

8 2. Recent development and headwinds The offshore RMB business continue to expand The Dim Sum Bond market Other forms of RMB asset Asset less than liability (deposit) Dim Sum bond issuance Source: HKMA, CEIC and BBVA Research RMB bn Offshore RMB asset and liability Source: Bloomberg and BBVA Research RMB bn * 0 Asset Dim Sum bond Loan REIT Deposit Liability 8

9 2. Recent development and headwinds The rise of other offshore RMB centers Hong Kong can t absorb global demand for RMB Risk to financial stability (bank liquidity and currency mismatches) Development of onshore market crucial Meanwhile development of other offshore centers also relevant Possible choices and relationship with Hong Kong - Singapore ( direct competition with Hong Kong?) - London ( Business hub?) - Taipei ( Service its own demand?) 9 -New York

10 2. Recent development and headwinds Headwinds against RMB internationalization emerged as appreciation expectation dampened The RMB appreciation trend halted amidst the intensification of European debt crisis Offshore Deposit stagnated recently The appreciation expectation of RMB weakened Source: HKMA, CEIC and BBVA Research Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 CNY spot CNY NDF 1Y RMB deposit in Hong Kong rose rapidly last year but slowed from Q Source: Bloomberg and BBVA Research RMB bn % May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 RMB deposit RMB deposit as % of total deposit (RHS)

11 3. Policy Suggestions The internationalization of RMB is still a policy driven one China s authorities policy initiatives Expansion of the pilot program Swap lines and direct trading with other currencies Limited liberalization of capital account: RQFII, RMB FDI, Easing of Hong Kong s policy regulation Liquidity limits: relaxation of RMB Net open position and liquidity ratio Utilization of Swap line to provide RMB liquidity 11

12 3. Policy Suggestions Preferential treatment for using the RMB as an invoicing currency in cross-border trade transactions and investment Direct trading of RMB against other currencies, especially with ASEAN trading partners, South Korea and Taiwan. Further develop the RMB market in Hong Kong and expand the pool of offshore RMB liquidity. Broaden RMB investment channels. Develop offshore Dim Sum Bond market by introducing RQDII 12

13 RMB internationalization: Recent Development and headwinds Comments welcome Alicia Garcia-Herrero 13