Renminbi internationalisation – the Central Bank’s perspective
Budapest Renminbi Initiative
Central Bank of Hungary
Szilárd Erhart
1
26 March2015
Agenda
Quick wrap of RMB internationalisation
Central banks’ responsibilities and the MNB’s Renminbi Program
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1. Background of RMB internationalisation
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„crossing the river by feeling the stones”
Deng Xiaoping
The RMB internationalisation story in short
1. PAST: Current account liberalisation implemented – RMB is now a trading currency
2. PRESENT: Capital account liberalisation started – RMB may become an investment currency (QFI, RQFI, ODI, QDII, etc)
3. FUTURE: Exchange rate and interest rate liberalisation is on the way- RMB may become a reserve currency
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You are here.
China’s share in global exports has jumped since its WTO membership in 2001
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Source: WTO http://www.wto.org/english/res_e/statis_e/its2013_e/section1_e/i05.xls
0
10
20
30
40
50
60
United States Europe China
1948 1953 1963 1973 1983 1993 2003 2012
Share in global exports (%)
RMB’s weight in payments and FX-market turnover is still low, but increased fast recently
Weight of selected currencies in payment and FX market turnover (2013)
Magyar Nemzeti Bank 6 Source: SWIFT, BIS
0%5%
10%15%20%25%30%35%40%45%50%
EUR
USD GBP JP
YAU
DCH
FCA
DSG
DH
KD THB
SEK
NO
KCN
YD
KKRU
BZA
RN
ZDM
XN TRY
Payment (SWIFT) FX market turnover (BIS)
The RMB’s payment weight in European renminbi centers grew to 20-40 percent
Renminbi payments value weights (international flows sent to and received directly from China and Hong Kong)
Magyar Nemzeti Bank 7 Source: SWIFT
26
40 3644
1219
58
23
6 8
74
60 6456
8881
43
77
94 92
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
July 2013July 2014July 2013July 2014July 2013July 2014July 2013July 2014July 2013July 2014
Others
CNY
United Kingdom France Germany Luxembourg Switzerland
RQFII (bn RMB)
Number of listed bonds (Dec
2013)
Portfolio investments to China (End of
2012)ASIA
Hong Kong BOC 945 401 270 98 288 49.5Singapore ICBC 254 76 50 74 50 23.7Taiwan BOC 268 197 100 13 na. 2.6
EUROPELuxembourg ICBC 67 2 40 38 0.4United Kingdom CBC 15 70 80 15 33 24.2France BOC 20 50 80 4 13 1.1Germany BOC 20 162 80 3 3 0.5
TOTAL 1589 958 660 247 425 102BUSINESS OUTLOOK (SWIFT) good good outstandingoutstanding
Official clearing bank
RMB deposits (bn RMB, Dec
2014)
Trade of goods with China (bn
USD, 2013)
Portfolio investment Average daily trading volume of RMB foreign
exchange (Apr 2013)
Hong Kong is the most important RMB center, however London and Luxembourg are coming up
Magyar Nemzeti Bank 8Source: PWC, SWIFT,
Central Banks
Central banks are collaborating with market participants on the RMB internationalisation
Renminbi initiatives in Europe
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City Country Intitiative Members from the private sectorMembers from the public sector
Frankfurt GermanyRMB Initiative group
Agricultural bank of China,Baker and Mckenzie,Bank of China,China Construction Bank,Citi,Commerzbank,Deutshe Bank, Deutshe Borse, DZ Bank,Frankfurt Main Finance,Gize,Helaba, HHSBC,ICBC, IHK, KFW,King and Wood,Messer,pwc, Simmons and Simmons, SWIFT, Volkswagen
Bundesbank, essisches Ministerum für Wirtschaft, Energie, Verkehr und landesentwicklung,
London United KingdomCity of London initative
Agricultural Bank of China,Australia and New Zealand Banking Group Limited,Bank of China, Bank of Communications (UK), Barclays, China Construction Bank,Citi, Deutsche Bank, HSBC, ICBC,JP Morgan, Royal Bank of Scotland,Standard Chartered
City of London, HM Treasury, Bank of England, Financial Services Authority
Luxemburg Luxemburg
Luxemburg Center for International RMB Business in the Eurozone
Bank of China, China Construction Bank, Clearstream, Luxembourg Stock Exchange, ICBC, Luxembourg Bankers' Association (ABBL), Luxembourg Fund Association (Alfi)
Finance Ministry, Commission de Surveillance du Secteur Financier
Paris France
Paris Europlace - Your Hub to the Eurozone
Bank of China, Paris, BPCE Natixis,BNP Paribas, Crédit Agricole, HSBC France, ICBC (Industrial and Commercial Bank of China), Paris, Société Générale
Banque de France, Trésor Francais
Budapest Hungary
Budapest Renminbi Initiative
Hungarian Banking Association, Hungarian Development Bank, Budapest Stock Exchange, Bank of China Hungary, Audi, Mercedes, ZTE, Huawei
Central Bank of Hungary, Ministry of Finance, Government Debt Management Agency
2. Central banks achievements, challenges and the MNB’s Renminbi Program
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1. Inter central bank swapline agreements2. RMB instruments3. Foreign reserve management4. Financial stability and supervisory issues5. Settlements and clearing
1. The PBOC’s network became the largest segment of the global inter central bank swapline network
The international swap line network structure*
Magyar Nemzeti Bank 11*The chart was prepared with Gephi network viwualisation software on the basis of information from Allen and Moessner (2010)1, Liao-McDowell (2013), PBoC and
central banks.
• The PBOC enlarged its network, while the ECB and FED did not
• The main objectives of swap line agreements are to • strengthen
economic relations • encourage bilateral
trade and investment activity and
• maintain financial stability
FED (2009) – 14 partners
Network of the big 6Chiang Mai
initiative
PBOC (2014) – 29 partners
BRICS (2014) ECB (2010)
The total valaue of PBOC swapline arrangements is over USD 400 bn
• The Central Bank of Hungary followed the example of the ECB and BoE and joined the PBOC’s swapline network in 2013.
• The PBOC carried out transactions amounting to RMB 511 billion (approx. USD 80 billion) in H1 2014.
• Operational risk may occur as some central banks have not yet drawn renminbi funds at all, and all conditions of bilateral swapline transactions have not been finalised yet.
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No Partner countryvalue (RMB)
value (USD) Announcement Extension
1 South Korea 360 57.6 2008 2011,20142 Argentina 70 11.2 2009 na3 Belarus 20 3.2 2009 na4 Hong Kong 400 64.0 2009 20115 Indonesia 100 16.0 2009 20136 Malaysia 180 28.8 2009 20127 Iceland 3.5 0.6 2010 20138 Singapore 150 24.0 2010 20139 Kazakhstan 7 1.1 201110 Mongolia 5 0.8 201111 Russia 150 24.0 2011 201412 Pakistan 10 1.6 201113 Thailand 70 11.2 201114 New Zealand 25 4.0 2011 201415 Uzbekistan 0.7 0.1 201116 Australia 200 32.0 201217 Brazil 190 30.4 201218 U.A.E 35 5.6 201219 Japan 20 3.2 201220 Turkey 1.6 0.3 201221 Ukraine 15 2.4 201222 Albania 2 0.3 201323 United Kingdom 200 32.0 201324 Euro Area 350 56.0 201325 Hungary 10 1.6 201326 Switzerland 150 24.0 201427 Sri Lanka 10 1.6 201428 Qatar 35 5.6 201429 Canada 200 32.0 2014
Total 2725 436
2. RMB instruments of central banks
Due to the limited convertibility in RMB offshore markets, central banks’ swapline network may serve financial stability purposes (liquidity backstop).
Main characteristics of central banks RMB instruments
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Central
banksGoal of swapline
Facility
announcedMaturity Settlement Price
BoE liqudity backstop
RNBZ liqudity backstop
RBA liqudity backstop SHIBOR + 25 bp
trade finance X 3M t+1 SHIBOR
HKMA liqudity backstopX
ON, TN, 1W t (O/N),
t+2 (TN,1W)
according to market rates
BOK trade finance X 3M, 6M SHIBOR
O/N - minimum CNH HIBOR
1W - SHIBOR
1M - SHIBOR
EKB liqudity backstop 1W t+4 SHIBOR + 100 bp
MAS liqudity backstop
X
O/N
1W
1M
t (O/N)
t+1 (1W)
t+1 (1M)
3. RMB foreign reserves
“(…) central banks across the world have started to hold onshore Chinese renminbi (CNY) in their reserves portfolios, (…) This is an
issue that the Eurosystem will also have to further reflect on in the future.”
Benoît Cœuré, ECB Executive Board member 17 November 2014
14
• Opportunities:• Liquid market: onshore Chinese government bond market is the
fifth-largest in the world • yield: relatively high, and RMB appreciation magnified yields of
unhedged positions in the past• Diversification gains: by lowering market, credit and concentration
risks• Strong fundamentals: low debt ratio, high ratings
• Investor CBs: BOE, RBA, BDC, BON, BOK, etc• Size of the RMB portfolio: 1-3 % of the total foreign reserves• Quota: Central banks have been granted investment quotas since
the first rounds of capital account liberalisation.• Challenges:
• differences in legal norms, • Implementation of investments (technical conditions, settlement,
communication, onshore or offshore?)• Transparency, follow-up and repatriation of investments
4. Financial stability and regulatory issues
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CHALLENGES• BOE – risks to financial stability: capital account
liberalisation can also be accompanied by risks to domestic and global financial stability Hooley, J. (2014)
• MAS - liberalisation requires adequate sequencing:
• Risk of capital outflow if liberalisation of capital controls is prior to the liberalisation of interest rates
• interest rate liberalisation may add to the costs of banks, reduce profit rates
• IMF, Eichengreen (2014) – further development of the institutional framework could be advantageous:
• establishment of deposit insurance and investment protection institutions,
• company information system and credit rating, independent central bank etc
• Currency mismatch risks (FX lending experience in CEE countries)
• FX reserve adequacy may worsen in non-eurozone countries
• FX- Liquidity Coverage Ratio may deteriorate in RMB hubs
• Regulatory arbitrage: Luxembourg used to be preferred to London due to Luxembourg’s more favourable supervisory practice
ANSWERS
• regulatory limits on the scope of banking services to protect tax-payers
• Monitoring of cross-border RMB activities • Currency mismatch• Capital flows• Regulatory arbitrage
• Continous development of the regulatory framework
• Supervisory cooperation with Chinese authorities • Establishment of information
sharing practices (similarly to supervisory colleges)
• Revision of MoUs on supervisory issues
• Development of the institutional framework
5. Clearing and settlement issues
Details of Chinese clearing and settlement agreements
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MoU on clearing arrangement
clearing bank
clearing bank announcement
South Korea 2008 2014.07.03 BoC 2014.07.14Hong Kong 2009 2009.03.19 BoC 2007Singapore 2010 2013.04.08 ICBC 2013.02.08New Zealand 2011Australia 2012 BoC 2015.02.15Frankfurt 2013 2014.03.28 BoC 2014.06.19London 2013 2014.03.31 CCB 2014.06.18Luxemburg 2013 2014.06.28 ICBC 2014.09.23Paris 2013 2014.06.30 BoC 2014.09.23Budapest 2013Switzerland 2014 2015.01.27Qatar 2014 2014.11.13 ICBC 2014.11.14Malaysia 2009 BoC 2015.01.08Thailand 2011 ICBC 2015.01.08
Swapline agreement
Official clearing bank
• PBOC typically concluded memorandums of understanding (MoU) on clearing and settlement with its swapline partner central banks.
• Official clearing banks: • BoC – Bank of China• CCB – China
Construction Bank• ICBC – Industrial and
Commercial Bank of China
• CIPS – China International Payment System is expected to be launched in September 2015 to process cross-border RMB transactions
The MNB’s Renminbi Program
• Starting point: RMB swapline agreement (September 2013)
• Budapest Renminbi Initiative (from March 2015)
• FX reserve management• Investigation whether a small portion of the foreign reserves could be
invested in renminbi assets.
• Clearing and settlement (from February 2015)• Planning of the renminbi clearing and settlement infrastructure • Memorandum of Understanding.• Supporting the appointment of the official renminbi clearing bank.
• RMB instruments (2015): • Investigation whether renminbi liquidity instruments can/should be
applied.
• Financial stability and supervisory issues (2015): • Investigation of the risks related to the increasing renminbi market
activity and monitoring of Chinese credit institutions, especially with regards to cross-border activity and to risks stemming from contagion and imbalances of the Chinese financial system.
• Cooperation with Chinese supervisory authorities and strengthening of the supervisory coordination and information sharing procedures.
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Thank you for your attentiaon!
谢谢
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