BEIJING LOOKS TO BROADEN RENMINBI USE / THE FINANCIAL TIMES ( RECOMMENDED READING )

Beijing looks to broaden renminbi use

By Jamil Anderlini in Beijing

Published: August 17 2010 14:34

China will allow foreign central banks and overseas lenders substantially to increase investment in its domestic interbank bond market, in a move aimed at encouraging internationalisation of the Chinese currency.

The People’s Bank of China, the central bank, said on Tuesday that it had launched a pilot project to allow more foreign access to its largely closed domestic interbank bond market to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back [to China]”.

Foreign central banks, lenders in Hong Kong and Macao that already conduct renminbi clearing and overseas banks involved in renminbi cross-border trade settlement will be allowed to participate in the Rmb19,500bn ($2,870bn) interbank bond market.

Beijing is trying to encourage use of the renminbi for trade as part of a long-term plan to promote it as a reserve currency and reduce China’s exposure to the US dollar, now used for most Chinese trade.

“This is an integral part of pushing the internationalisation of the renminbi,” said Wang Tao, chief China economist at UBS. “In order to encourage foreign institutions to get involved in renminbi settlement, you need to give them somewhere to invest.”

This will be the first time that non-resident institutions are permitted in China’s biggest bond market to trade government and corporate debt. Foreign financial institutions are currently only able to invest renminbi they already hold onshore.

The only other channel through which non-residents can access Chinese capital markets is through a small and highly restricted scheme that allows approved foreign institutions to buy Chinese-listed equities and bonds traded on the stock exchanges.

Analysts said the pilot programme for the interbank market would still be subject to restrictive quotas handed out by the PBoC to foreign lenders banks and central banks.

By the end of June about Rmb20bn worth of China’s cross-border trade was denominated in renminbi, a fraction of the country’s Rmb9,400bn in total exports last year.

“If they don’t allow people who accumulate renminbi to make proper investments, the internationalisation of the renminbi will quickly hit a wall,” said Zhang Zhiming, an analyst at HSBC. “So the central bank will probably allow the quotas to grow quite quickly.”

Non-resident institutions and individuals that hold renminbi are currently only able to deposit them with Chinese and Hong Kong banks.
Although there is only a relatively tiny amount of renminbi held outside the country, the demand for Chinese bond investments is expected to be high as the currency continues its gradual appreciation.

In June, China expanded a renminbi cross-border trade settlement pilot scheme to every country in the world and to 20 Chinese provinces and municipalities, allowing companies to invoice and settle imports and exports in renminbi rather than US dollars.

Beijing has also signed currency swap agreements with central banks and monetary authorities in seven countries, with agreements totalling a little over Rmb800bn.

Copyright The Financial Times Limited 2010.