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

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• 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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