London key rival to HK in yuan offshore biz

Players in the nascent offshore yuan market are calling on the Chinese government to streamline its regulations, as they believe the complexity and frequent modifications of rules pose a big barrier to attracting more participants.

Beijing is promoting its currency to the world keenly, yet cautiously. It has been willing only to take small steps forward after seeing success on a trial basis, whether in yuan trade settlement, dim sum bond issuance or investment in the Chinese mainland in general.

It's important that market participants encourage regulators to simplify rules and regulations, said John Tan, head of global markets and co-head of wholesale banking at Standard Chartered Bank (Hong Kong).

"Even for people like us who are close to the market, after so many rounds of refinements, sometimes we also lose track of what is the latest development," he said.

China has been sparing no effort to make the global status of its currency in line with that of its economy since 2009, when it started a pilot program on yuan cross-border trade settlement.

The yuan is getting more important in the world. According to global transaction services organisation SWIFT, the yuan in August moved up one position to become the world's 14th most-used currency with a 0.53 percent market share, compared with 0.45 percent in July.

At present, the Chinese currency can flow freely when used for financing trade, while flows under the strictly-controlled capital account only apply to programs such as yuan qualified foreign institutional investor (RQFII) and overseas direct investment (ODI).

For foreign or even Chinese corporate and financial institutions new to the dim sum market, regulations and requirements in different channels of cross-border capital movement can be confusing.

For example, an issuer who sells an offshore yuan bond in Hong Kong and wants to remit the proceeds to China needs to secure approval from Ministry of Commerce if the money is for an equity injection but from the State Administration of Foreign Exchange if it's a shareholder's loan.

Also, the approval procedure and timeframe will depend on issuer's onshore entity having sufficient foreign debt quota, as well as on the industry involved and nature of the transaction -- which add to the uncertainties for repatriation.

Clifford Tan, East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ, noted that the success of London's euro dollar market was largely due to a relaxed environment, while the failure of the Japanese yen to become a global reserve currency stemmed from insufficient openness in the region's financial markets.

"The key competitor that I see for Hong Kong in CNH (offshore yuan) going forward is London, as it does not have that many rules," he said.

China aims to basically liberalize its capital account by 2015. Market participants are waiting to see if more controls can be lifted in the offshore yuan market after a leadership transition for the Communist Party in November.

 

Reuters