Treasury Division Renminbi Monitor January 2013 Joanne Yim Chief Economist joanneyim@hangseng.com Renminbi Internationalisation The Journey Begins After decades of rapid growth, mainland China has become the second-largest economy in the world, after the US. Despite the Mainland s growing economic dominance, the Chinese renminbi (RMB) remains underutilised internationally. However, this situation is slowly changing, due largely to the Mainland s strategy to promote the use of the RMB beyond its borders. There has been increasing international acceptance of the RMB as a trade settlement and investment currency. Some central banks have also started to add RMB-denominated securities to their foreign exchange reserves. Going forward, more policies are likely to be launched to facilitate the expansion of the RMB offshore market and to overcome the currency s limited convertibility. These may include measures to allow more two-way cross-border flows and two-way fluctuations of the RMB against other major currencies, as well as identifying more offshore and onshore cities for pilot RMB trading activities. As a Chinese city with special administrative status and a first-mover in the development of offshore RMB financial markets, Hong Kong stands to benefit greatly from the growing internationalisation of the RMB. The RMB exchange rate is expected to strengthen slightly in 2013. The USD/RMB midpoint rate set by the People s Bank of China (PBOC) is likely to be near 6.20 by the end of 2013, representing an appreciation of 1.4% for the RMB compared with the end of 2012. The Mainland authorities could also widen the daily trading band for the USD/ RMB exchange rate to 1.5% to 2%, from the current 1%. With economic growth on the Mainland stabilising and sentiment in the housing market expected to improve, there is likely to be less pressure on the PBOC to further ease monetary policy in 2013. The benchmark lending rates are expected to remain unchanged during the year, with the one-year lending rate held at 6%. Looking further ahead, Hong Kong s offshore RMB deposits, excluding Certificate of Deposits (CDs), could account for over 25% of total deposits in Hong Kong by 2015, from less than 10% at the end of 2012. This would make RMB deposits the secondlargest source of deposits in Hong Kong, replacing the position long held by US dollar deposits. The Chinese government has been taking steps to expand the use of the RMB outside the Mainland s borders. Its efforts are gradually paying off. The RMB is slowly gaining acceptance as a global trade settlement currency. It is also being more widely recognised as an international investment currency and the range of offshore RMB products has expanded to include deposits, bonds, equities, funds, derivatives, etc. A few countries have started to include the RMB in their foreign exchange reserves a small step towards making the RMB a reserve currency. But while the journey to internationalise the RMB has begun, there is still a long way to go before the RMB becomes a truly global currency capable of challenging the US dollar s dominant status. The Mainland authorities look likely to maintain their twopronged approach for accelerating the process of RMB internationalisation that is, they will continue to promote offshore RMB business in more financial centres, both inside and outside of the Mainland and to implement policies to reform the country s financial markets and open up capital accounts.
A unique strategy: Push for internationalisation before full currency convertibility The usual path for currency reform is to first achieve full convertibility and then aim at some degree of internationalisation, if at all. For example, the US dollar became convertible into gold in 1900 but it only replaced the British pound to become the dominant currency in the global economy during the 1920s. Today, the US dollar is the most-traded currency in foreign exchange markets around the world, accounting for about 85% of total transactions, according to the Bank of International Settlement s most recent Triennial Central Bank Survey. In addition, the International Monetary Fund reports that around 60% of international reserves are denominated in US dollars. There are also examples of currencies that are fully convertible but not internationalised. Such currencies include the Japanese yen and the Hong Kong dollar. The former became fully convertible in the 1980s, after its government lifted all restrictions on capital account transactions. However, the yen is far from being internationalised despite the fact that Japan was the second-largest economy in the world during the latter part of the last century. Similarly, the Hong Kong dollar is fully convertible but is hardly used outside Hong Kong. Reasons for RMB internationalisation There are two main factors behind the Chinese government s decision to embark on this journey of RMB internationalisation. First, there is a growing feeling that the Mainland should have a currency that reflects its rising global economic dominance. Second, international use of the RMB will enable China to reduce its reliance on the US dollar for trade and other purposes, making the country less vulnerable to fluctuations in the US currency. Growing economic power but underutilised currency After three decades of rapid economic growth, in the second quarter of 2010 the Mainland overtook Japan to become the second-largest economy in the world. Japan had held the number-two spot since 1968. The Mainland s economy was valued at about USD7.5 trillion in 2011. Depending on the calculation methodology used, this accounted for between 10% and 14% of 2011 world GDP. In terms of contribution to growth, the Mainland economy is even more important due to its relatively faster pace of expansion as compared with other leading economies, and in the past decade, it has accounted for about one-quarter of world GDP growth. For the RMB, the Chinese government seems to have chosen a different path. The Chinese currency achieved current account convertibility in the 1990s, and mainland importers and exporters are able to purchase or sell foreign currency for RMB for trade purposes. But there are still restrictions on capital flows, particularly short-term flows, and the RMB is not yet fully convertible. However, the Mainland authorities have been actively promoting the use of the RMB outside the Mainland mainly in Hong Kong, Singapore, Taiwan and London. It seems that the authorities are trying to gradually internationalise the RMB before it becomes fully convertible. Gross Domestic Product in Current Prices USD trillion 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 80 85 90 95 00 05 10 Mainland China Japan US 2
GDP Share of World Total in 2011 Mainland China s Foreign Exchange Reserves 21.6% 3.5 3.0 59.6% 10.4% USD trillion 2.5 2.0 1.5 1.0 8.4% 0.5 US Mainland China Japan Rest of the World 0.0 90 92 94 96 98 00 02 04 06 08 10 12 The Mainland s growing importance is reflected in its position as the world s largest exporter (replacing Germany in 2009), accounting for about 11% of world exports and 9% of world imports in 2011. The Mainland also has the world s biggest foreign exchange reserves, amounting to USD3.3 trillion as at the end of 2012. Mainland China s Share of World Exports and Imports % 11 10 9 8 7 6 5 4 3 2 1 0 90 92 94 96 98 00 02 04 06 08 10 12 Mainland s Share of World Exports Mainland s Share of World Imports But despite this central role in the global economy, a large proportion of payments in and out of the Mainland is not in RMB but in US dollars. This is in sharp contrast to the US, where more than 90% of payments in and out of the country are in its domestic currency. November 2012 estimates from SWIFT show that the RMB ranked just 14th in terms of the world s most-used payment currencies, with a 0.56% share in terms of payments value. In the foreign exchange market, the RMB is also under-represented when compared to the size of the Mainland economy. SWIFT estimates that the RMB had a world market share of only 0.9% in foreign exchange value in June 2011 but a world GDP share of 10.4% in 2011. Under-representation of RMB in Foreign Exchange Value Rank Currency % Share of FX (June 2011) % Share of World GDP (2011) 1 USD 45.9 21.6 2 EUR 16.9 18.8 3 JPY 6.8 8.4 4 GBP 5.8 3.5 5 AUD 3.7 2.1 14 CNY 0.9 10.4 Sources: SWIFT, IMF, Hang Seng Bank 3
Reducing reliance on the US dollar The financial crisis of 2008 is also a factor behind the Mainland s decision to internationalise the RMB as it highlighted the risks of over-reliance on the US dollar as a global settlement and reserve currency. The financial crisis, which intensified in late 2008, led to deteriorating funding conditions, a decline in consumer and investor confidence, and a dramatic slump in world trade plunging advanced economies into a deep recession. Governments and central banks worldwide launched measures to stabilise their financial systems and stimulate economic activity. The US Federal Reserve, for instance, cut key interest rates to near zero in December 2008 and adopted quantitative easing in early 2009 in a bid to revive lending. The impact of these policy moves caused sharp fluctuations in financial markets and movements in the US dollar were also volatile. The dollar lost about 15% of its value against a basket of major currencies between March and December 2009, before rebounding some 20% in the ensuing seven months. The dollar s increasing volatility became a concern for Mainland exporters, many of whom rely on manufacturing trade business with wafer-thin profit margins. US Dollar Index 92.5 90.0 87.5 85.0 Index 82.5 80.0 77.5 75.0 72.5 70.0 06 07 08 09 10 11 12 Currency volatility also created uncertainty for the Mainland s monetary authorities as a large proportion of the country s USD3.3 trillion in foreign exchange reserves are believed to be denominated in US dollars. Currency Composition of Mainland China s Official Foreign Exchange Reserves (% share of total) 2001 2006 2011 US dollar 70.7 65.7 62.2 Euro 19.8 25.2 25.0 British pound 2.7 4.2 3.8 Japanese yen 5.2 3.2 3.5 Swiss franc 0.3 0.2 0.1 Others 1.2 1.5 5.4 Source: IMF Governor of the PBOC Zhou Xiaochuan wrote three articles in 2009 calling for the establishment of an international reserve currency that is not tied to any sovereign country and is able to maintain long-term stability in value. He suggested using Special Drawing Rights (SDRs) as an alternative to the US dollar. But given the many technical and other difficulties in shifting to a SDR-based reserve currency, the Mainland has instead decided to push for the increasing use of the RMB in global trade and other transactions. Milestones for RMB internationalisation The RMB s journey to the world began in Hong Kong. The city was chosen to run pilot programmes for offshore use of the Chinese currency. Banks in Hong Kong were first permitted to provide RMB deposit, exchange, remittance and credit card services to personal customers in 2004. Further relaxation occurred in 2007 when the authorities allowed Mainland financial institutions to issue RMB bonds in the city. However, progress was slow during those early years as Hong Kong residents had little incentive to shift their savings from Hong Kong dollars and other foreign currencies into RMB. Regulatory restrictions also limited the convertibility of the RMB in the offshore market. 4
The internationalisation of the RMB really began to take off in 2009 when the Mainland authorities permitted cross-border trade between Hong Kong and pilot Mainland cities to be settled in RMB. The practice was then extended to other countries trade with the Mainland. Data from the PBOC showed that China s total cross-border trade settled in RMB amounted to RMB2,935.2 billion in 2012. RMB Internationalisation Milestones RMB as a Global Trade Currency Jul-09 Launch of cross-border RMB trade settlement pilot scheme Jun-10 Cross-border RMB trade settlement scheme expanded to 20 provinces and cities on mainland China as well as covering the whole world outside mainland China Dec-10 List of eligible exporters on mainland China under cross-border RMB trade settlement scheme expanded Aug-11 Geographical coverage of cross-border RMB trade settlement scheme expanded to incude the whole of China Mar-12 Cross-border RMB trade settlement scheme expanded to include all enterprises on mainland China RMB as a Global Investment Currency Nov-03 PBOC agrees to provide RMB clearing arrangements in HK Jan-04 Personal RMB business commences in HK Jul-07 China Development Bank issues first RMB bond in HK Sep-09 Ministry of Finance of PRC issues first sovereign RMB-denominated bond in HK Jul-10 Launch of offshore RMB market in HK, with all corporates permitted to open RMB accounts Aug-10 Onshore RMB interbank bond market opened to eligible offshore RMB financial institutions Sep-10 First issue of RMB bond by a multinational corporation Jan-11 Mainland enterprises permitted to make outward direct investment in RMB Apr-11 Launch of first RMB listed securities in HK Oct-11 Formalisation of RMB foreign direct investment scheme Dec-11 Eligible mainland-based brokerages and asset management firms in Hong Kong permitted to invest in Mainland s bond and equity markets under RQFII channel Feb-12 Launch of world s first RMB-denominated gold ETF in HK Apr-12 RQFII quotas increased May-12 Mainland non-financial institutions permitted to issue RMB bonds in HK Aug-12 Personal RMB business in HK expanded to non-hk residents RMB as a Global Reserve Currency Dec-10 Several central banks add RMB to their foreign exchange reserves More measures to expand the scope of offshore RMB business were announced in 2010. The PBOC, the Hong Kong Monetary Authority (HKMA) and the Bank of China (Hong Kong) signed an amended clearing agreement for RMB on July 19, allowing for interbank transfers of RMB deposits in Hong Kong, as well as granting permission for companies in Hong Kong to exchange foreign currency for RMB without limit as long as the resulting open position are not squared with RMB Clearing Bank. One month later, the Mainland authorities announced the partial opening up of the Mainland s interbank bond market for foreign central banks, RMB clearing banks in Hong Kong and Macau, and other foreign banks participating in cross-border trade settlement in RMB. 5
Other schemes were later added, including RMB Outward Direct Investment (RODI), RMB Foreign Direct Investment (RFDI) and RMB Qualified Foreign Institutional Investor (RQFII). This latter scheme allows offshore financial institutions to invest their offshore RMB funds in the Mainland s onshore interbank bond and equity markets. All the schemes, which allow more outflows of RMB to offshore markets, as well as for offshore RMB to return to domestic capital markets, helped accelerate the internationalisation of the RMB. At the same time, the PBOC has also been establishing and expanding local currency bilateral swap lines with central banks around the world to facilitate and expand the use of the RMB in international trade and financial transactions. The amounts of these bilateral agreements are small (the largest is RMB400 billion with the HKMA in Hong Kong), but they indicate efforts to make other countries central banks comfortable and familiar with RMBdenominated instruments and facilities. Currency Swap Agreements between PBOC and Other Central Banks Amount Date (RMB bn) Indonesia Mar-09 100 Argentina Mar-09 70 Belarus Mar-09 20 Iceland Jun-10 3.5 Singapore Jul-10 150 New Zealand Apr-11 25 Uzbekistan Apr-11 0.7 Kazakhstan Jun-11 7 Russia Jun-11 N.A. Korea Oct-11 360 Hong Kong Nov-11 400 Thailand Dec-11 70 Pakistan Dec-11 10 UAE Jan-12 35 Malaysia Feb-12 180 Turkey Feb-12 10 Mongolia Mar-12 10 Australia Mar-12 200 Ukraine Jun-12 15 Total 1,666.2 The RMB has also started to appear in a few central banks foreign exchange reserve portfolios. Malaysia and Nigeria first reported RMB reserves in 2011. Other central banks, including those in South Korea, the Philippines and Indonesia, have also expressed interest in including RMB-denominated instruments in their portfolios. Hong Kong as a dominant offshore RMB centre Deposits As RMB internationalisation started in Hong Kong, the city has emerged as a leading offshore RMB market. Despite strong competition from other emerging offshore RMB centres, Hong Kong is expected to maintain its dominant position due to its unique position, first-mover advantage and continued support from the Mainland authorities. The volume of RMB deposits accumulated in Hong Kong s banks began to surge in 2010 after the launch of the cross-border RMB settlement scheme. Although the pace of growth has slowed somewhat in the past year due mainly to diminished expectations of RMB appreciation as well as additional investment choices for offshore RMB deposit holders the deposit pool still amounted to RMB571 billion as at the end of November 2012, accounting for about 9% of total deposits in the Hong Kong banking system. The size of RMB deposit funds in Hong Kong amounts to about RMB670 billion if RMB CDs are included in the calculation. The total pool (deposits and CDs) is much larger than that in other RMB offshore centres. Singapore is said to have a RMB deposit pool of about RMB60 billion as at June 2012. London had about RMB35 billion in 2011, not including interbank RMB deposits, and Taiwan about RMB21.5 billion at the offshore banking units (OBU) of banks operating on the island at the end of November 2012. Source: PBOC 6
The pace of RMB deposit growth could accelerate again in the near term as the RMB has been regaining strength after the conclusion of the 18 th National Congress of the Communist Party of China and the announcement of the new politburo standing committee in mid-november 2012. In fact, the Chinese currency hit the 1% trading band limit permitted by the PBOC throughout November and December 2012, rising to a 19-year high versus the US dollar. Renminbi Deposits in Hong Kong RMB billion 700 600 500 400 300 200 100 0 03 04 05 06 07 08 09 10 11 12 Renminbi Deposits in Hong Kong (Share of total deposits in Hong Kong) % share 11 10 9 8 7 6 5 4 3 2 1 0 03 04 05 06 07 08 09 10 11 12 the Chinese currency has surged. According to PBOC statistics, China s total cross-border trade, including goods, services and other current account activities, settled in RMB amounted to RMB2,935.2 billion in 2012; and that in goods totaled RMB2,060 billion. The latter accounted for 8.4% of Mainland s total exports and imports of goods during the same period. Remittances of RMB used for cross-border trade settlement in Hong Kong rose to an average of RMB215 billion a month in the first 11 months of 2012, compared with monthly averages of RMB57 billion in the second half of 2010 and RMB160 billion in 2011. These statistics show that Hong Kong has a dominant position in the Mainland s cross-border trade settlement flows. Cross-border Trade Settlement in RMB in Hong Kong RMB billion 300 250 200 150 100 50 0 7/2010 10/2010 1/2011 4/2011 7/2011 10/2011 1/2012 4/2012 7/2012 10/2012 Sources: HKMA, Hang Seng Bank Total RMB Cross-border Trade Settlement (% share of total, as at Dec 2011) 21.4% Cross-border trade settlement 2.4% 2.4% 2.5% 63.7% The use of RMB in cross-border trade settlement 7.6% marked a turning point in the development of Hong Kong as an offshore RMB centre. Since it began in 2009, cross-border trade settlement in HK Macau Singapore Japan Taiwan Others Sources: PBOC, Hang Seng Bank 7
Dim sum bonds Hong Kong s RMB bond (commonly referred to as dim sum bonds ) market has experienced rapid growth since the end of 2010 after the Chinese government expanded the pool of dim sum bond issuers beyond Mainland financial institutions to include multinational corporations and international financial institutions in 2010 and Mainland corporations in 2011. There has also been continuing growth since the Mainland authorities announced rules that establish a permitted procedure for remitting the proceeds of an offshore bond issue to the Mainland. The total value of dim sum bond issuance rose to RMB175 billion, with 84 issuers, in 2012. RMB trading The rapid development of RMB markets is also reflected in increasing interbank trading activity in offshore RMB in Hong Kong. The average daily turnover in the spot offshore RMB market is estimated to be about USD2.7 billion in 2011, of which USD1.5 billion, or 56%, was carried out in Hong Kong. Average Daily Turnover in Spot RMB Offshore Market in 2011 (USD billion) 0.5 1.5 New Dim Sum Bond Issuance By year CNY bn No. of issuers 2007 10 3 2008 12 3 2009 16 4 2010 35.7 19 2011 152 87 2012 175 84 By issuer type 2010 2011 Corporates 22% 43% Chinese FIs 46% 40% Supranationals 26% 13% Foreign FIs 3% 4% By tenor 100% 100% 2011 1Yr 27% 2Yr 15% 3Yr 42% 5Yr 12% 7Yr 4% 100% Source: Bloomberg, Hang Seng Bank 0.7 HK London Others Sources: The City of London Corporation, Hang Seng Bank Development of other offshore RMB centres Apart from Hong Kong, other cities have begun to explore and/or develop offshore RMB business. These include international cities such as London and Singapore, as well as domestic cities on the Mainland, such as Shanghai, Tianjin and Qianhai in Shenzhen. Many of these cities have considerable potential to challenge Hong Kong s position as the dominant offshore RMB centre. For example, London is a leading international financial centre, commanding the largest share of foreign exchange trading in the world. The city also has a deep talent pool of financiers and a strong track record of innovation and risk management. Its time zone, sound legal system and comprehensive regulatory framework also work in its favour. Despite its late start, London is accumulating a growing amount of RMB deposits. By the end of 2011, more than RMB109 billion was deposited with banks in London, including RMB35 billion from personal customers and RMB74 billion from the interbank market. 8
Singapore and Taiwan are also vying for a share of offshore RMB business. While Singapore is still awaiting Beijing s decision on appointing a clearing bank for RMB in the city-state, Taiwan seems to have moved one step ahead. Bank of China s Taipei branch was appointed as a clearing bank for RMB business in Taiwan in December 2012, making it an official offshore RMB centre after Hong Kong. This development is important as it will facilitate the opening of bank accounts and interbank trading in RMB in Taiwan. According to SWIFT, Taiwan currently only processes less than 1% of global offshore RMB payments, much less than runaway leader Hong Kong with a market share of around 70%, or even London and Singapore (each with about 3%). However, volume in Taiwan looks likely to expand given the extent of bilateral trade between the island and the Mainland. Taiwan s trade with the Mainland has grown substantially over the past two decades. Taiwanese investment also accounts for a substantial share of foreign direct investment on the Mainland. The Mainland s experimentation with RMB internationalisation is not restricted to offshore centres. Its domestic cities could also play an increasingly important role. Qianhai, a coastal strip in Shenzhen, will serve as a pilot zone for the loosening of restrictions on RMB flows between Hong Kong and the Mainland, and a liberalisation of trade in services. The PBOC announced in late December 2012 that companies registered in Qianhai would be allowed to borrow RMB from banks in Hong Kong for use locally. With the detailed rules on application procedures and loan limits recently set out, the start of cross-border RMB lending will have far-reaching implications for the Mainland s financial liberalisation and Hong Kong s development as an offshore RMB centre. For a start, the interest rates and tenor of the cross-border RMB loans will be decided by banks and borrowers. This represents a further move towards the liberalisation of interest rates as banks on the Mainland currently have to set loan rates based on the PBOC s benchmark. Cross-border RMB lending represents a further step in the opening up of the Mainland s capital account. Banks in Hong Kong will have greater use for the RMB deposit pool, giving them more incentive to offer better interest rates to attract RMB deposits. Such a development would not only lead to faster growth in RMB loans and deposits in Hong Kong, but also narrow the interest rate gaps for RMB funds between the Mainland and Hong Kong. Economic reforms on the Mainland The benefits of RMB internationalisation are plenty, with one of the most immediate being the reduction in transaction costs for Mainland companies engaging in global trade and investment. Currency risks for Mainland international investment positions will also be lower. In the longer term, the growing use of the RMB in global trade and investment will also enable the Mainland to reap seigniorage tax income, a benefit currently enjoyed by the US government with the US dollar being the dominant global currency. More importantly, however, RMB internationalisation will help reduce the Mainland s vulnerability to fluctuations in the US dollar and US economic policy changes, and will increase China s influence in reshaping the global financial system. Other far-reaching benefits of RMB internationalisation may include acting as a spur to accelerate financial and exchange rate reforms on the Mainland, as such reforms are critical if the RMB is to become a truly international currency. 9
Interest rate reforms In most developed economies, central banks only set a target rate for overnight interbank rates for example, the fed funds target rate of the US Federal Reserve and the main refinancing rate of the European Central Bank to guide the direction of commercial interest rates. On the Mainland, however, the PBOC determines the whole range of policy interest rates, including the benchmark lending and deposit rates of all commercial banks, which are then subject to the approval of the State Council. Such a system has disadvantages. For depositors, for instance, artificially low bank deposit interest rates may impose negative investment returns on their savings. Due to the lack of other investment options, this has caused some depositors to shift funds from bank savings into the real estate and stock markets, often resulting in asset bubbles and intensifying domestic inflation pressures. The standardised policy interest rates for all commercial banks has created a banking environment with low competition, leading to inefficient and oversized operations. The banks have reduced motivation to improve their management of financial risk or their operational competitiveness. The situation is changing slowly. Commercial banks on the Mainland have been given more flexibility (within a stipulated range) to decide the interest rates they want to offer to consumers, meaning banks can now offer higher interest rates to savers (up to 110% of the benchmark deposit rate) and lower rates to borrowers (no less than 70% of the benchmark lending rate). Restrictions are likely to be further relaxed as the Mainland s financial institutions become more competitive and are increasingly able to operate in accordance with commercial principles. Other financial industries, including the equity, bond and insurance markets, are also likely to grow. Exchange rate reform and capital account convertibility Apart from giving banks more flexibility in setting interest rates, the Mainland authorities have also taken steps to reform the RMB exchange rate. In fact, the process has been underway for the past three decades, first allowing the RMB to depreciate, and later to appreciate, against the dollar. The RMB exchange rate has appreciated over 30% against the US currency since 2005. At the same time, the RMB exchange rate has been permitted to move within a wider range: from a daily band of 0.3% against the US dollar in 2005, to 0.5% in 2007, and then 1% in April 2012. USD/CNY Spot Exchange Rates 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 07 08 09 10 11 12 13 In contrast to the situation in recent years, the RMB exchange rate is no longer a one-way bet for investors and has been exhibiting stronger two-way fluctuations. This trend is likely to persist as the Mainland economy gradually reduces its reliance on exports for growth, and its current account surplus is likely to stabilise at around 3% of GDP. Hang Seng s forecast calls for a RMB exchange rate of around 6.20 against the US dollar by the end of 2013. In addition, the Mainland authorities may permit greater fluctuations in the RMB exchange rate by widening the daily trading band for the USD/ RMB rate from its current level of 1%. The liberalisation of the capital account is a critical condition for further RMB internationalisation. The process has already begun, and looks set to gain momentum, enabling more investment funds to flow in and out of the Mainland. Although there are still capital controls in place, they are being gradually, selectively and cautiously dismantled. Inflows and outflows have been increasing with the expansion of schemes like Qualified Domestic Institutional Investor (QDII), Qualified Foreign Institutional Investor (QFII) and RQFII. 10
Outlook for 2013 The ultimate aim is for the RMB to become a fully convertible currency, to be used in global trade settlement, investment and reserve management. But to achieve such a goal, the domestic sector will have to undergo further structural changes, including interest and exchange rate liberalisation, financial market reforms and, ultimately, capital account convertibility. In the years ahead, more policies are likely to be launched to accelerate the process of RMB internationalisation. These may include measures to allow more two-way cross-border flows and twoway fluctuations of the RMB against other major currencies, as well as identifying more offshore and onshore cities for pilot RMB trading activities. The private sector will respond by launching more hedging, investment, loan and insurance products denominated in the Chinese currency. The RMB looks set to gain importance in the global economy and Hong Kong stands to benefit as an offshore RMB centre. The following is a summary of Hang Seng predictions: The RMB exchange rate is expected to maintain a slightly firmer position against the US dollar, with expectations of a rebound in the Mainland s exports and the resulting trade surplus. The PBOC s USD/RMB mid-rate is likely to be near 6.20 by the end of 2013, representing an appreciation of 1.4% for the RMB compared with the end of 2012. The Mainland authorities are likely to tolerate greater fluctuations in the RMB exchange rate by widening the daily trading band for the USD/RMB rate to 1.5%-2% from its current level of 1%. With Mainland growth stabilising and sentiment in the housing market expected to improve, there is less pressure on the PBOC to further ease monetary policy. The benchmark lending rates are expected to remain unchanged during the year, with the one-year lending rate held at 6%. Hong Kong s offshore RMB deposit pool, excluding CDs, could grow at a faster pace, reflecting an expected rebound in cross-border trade settlement flows and potentially higher deposit interest rates as banks compete for RMB deposits. RMB deposits could account for over 25% of total deposits in Hong Kong by 2015, from less than 10% at the end of 2012. This will make RMB deposits the second-largest source of deposits in Hong Kong, replacing the position long held by US dollar deposits. With the RMB gaining increasing acceptance globally, more companies will choose to settle their cross-border trade in RMB. The amount of cross-border trade settlement in RMB could grow by about 20% in 2013, faster than Hong Kong s total trade flows with the Mainland. 11
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