SDR creates big basket of opportunities

IMF decision means greatly expanded Business for banks, finance houses and infrastructure

The internationalization of the renminbi has come with an unprecedented amount of opportunities for both Chinese and international financial institutions, and they are now expecting more deals from the International Monetary Fund's inclusion of the yuan in its basket of special drawing rights reserve currencies.

Ranging from banks to security firms, the global growth of offshore renminbi activities in recent years has meant that many leading international institutions are strategically prioritizing their China operations quickly and dramatically.

One such company is Haitong Securities, a Shanghai firm founded in 1988, which established a European presence in September by acquiring Lisbon-based Espirito Santo Investment Bank. It has many European clients investing in China, in stocks, bonds, fixed income instruments and investment banking activities.

Miranda Carr, senior analyst at Haitong Securities (UK) Ltd, says she expects to see an increase in renminbi activities from the SDR inclusion. In the short term, Haitong anticipates more of its institutional clients to purchase Chinese bonds as they rebalance their assets' weighting.

This rebalancing is due mainly to many central banks and institutional investors seeing a need to match their foreign reserves or asset allocation to the SDR composition, and purchasing Chinese bonds is the most straightforward way of holding renminbi assets.

In the longer term, additional liberalization moves by the Chinese government to further open up the country's financial markets would also lead to more activity from Haitong's clients in the stock market, fixed income and investment banking sectors, Carr says.

Since the acquisition of Espirito Santo Investment Bank, Haitong has used its advantage of having a presence in both China and Europe to attract many clients in Europe who invest in China. Prior to the acquisition, the Espirito Santo bank had few clients investing in China since it did not have subsidiaries in China to facilitate deals.

After China decided to push for the renminbi's internationalization after the financial crisis, the country has implemented many measures to liberalize its capital accounts, and to facilitate more market-driven trade and investment flows in renminbi.

The growth in offshore renminbi activities initially started with trade activities, as more Western companies started to invoice their Chinese suppliers in renminbi to secure a better margin, because this method would allow Chinese suppliers to reduce their exchange risk.

Over time, investment activities also grew, as investors had many ways to invest in China, including the renminbi qualified foreign institutional investor program, mutual fund recognition, dim sum bonds and stock connects to tap RMB-denominated assets.

RQFII is a program that allows certain institutional investors with official approval to invest in China's stock and bond markets, while mutual fund recognition allows certain qualified mutual funds in the mainland's onshore market and Hong Kong's offshore market to be sold in each other's markets. Dim sum bonds are renminbi bonds sold to offshore investors, and stock connects allow mainland and Hong Kong investors to buy stocks in each other's markets.

All the market-driven demand for renminbi activities has led to a big increase in business for banks overseas, such as Standard Chartered and HSBC.

"All these positive initiatives and measures have increased the familiarity and usage across various sectors and geographical regions, creating valuable business opportunities for Standard Chartered," says Carmen Ling, managing director and head of RMB solutions at the bank.

In 2010, Standard Chartered helped McDonald's issue the first dim sum bond for a multinational corporation in Hong Kong, just as the offshore renminbi market started to grow internationally.

In 2012, the bank pioneered its Renminbi Globalization Index, the industry's first benchmark that effectively tracks the progress of RMB-based business activity worldwide.

More recently, Standard Chartered China became one of the first participants in China's international payments system as it completed an RMB clearing transaction from China to Luxembourg for Ikea.

Launched in October, the payments system is a global clearing method for real-time settlements in the currency. It connects China with most offshore yuan centers and countries in Asia, Oceania, Europe and Africa, and supports cross-border goods and services trade settlement, direct investment, fundraising and personal remittances.

Ling says official recognition of the renminbi as a global reserve currency is more than just a milestone for the RMB. It has significant, game-changing effects on the rest of the world's markets.

"It is important for us to educate our clients and take a leadership position in embracing these changes and developments," Ling says.

In addition to helping create offshore renminbi products, some financial institutions are helping the Chinese government devise policies to push the renminbi's internationalization further from a macroeconomic perspective.

One example is HSBC, which is working closely with Chinese policymakers to grow the RMB green finance market by sharing its understanding of international best practices.

Green finance, which includes asset classes such as green bonds and green initial public offerings, uses financial mechanisms to channel funds into socially responsible activities. The push to grow renminbi-denominated green finance activities is an example of policy direction that increases international demand for renminbi activities, instead of just reacting to the market.

Although most green bonds are denominated in the dollar or the euro, the International Finance Corp issued the first RMB green bond in June last year, and HSBC acted as sole lead manager for the deal.

To further help China grow its green finance market, HSBC hosted an April forum in Beijing on sustainable financing, the first of its kind and well-attended by Chinese policymakers, banks, insurance firms, and corporate and public sector clients.

In addition, HSBC has contributed to the People's Bank of China's preparations for its own interpretation of green bond classifications. It also worked closely with the UK Treasury on the seventh UK-China Economic and Financial Dialogue, and its key suggestions were included in the policy outcome paper published by the Treasury. An example is the suggestion that the Bank of England and China's central bank jointly lead a working group on international green finance to inform China's G20 presidency in 2016.

Closely linked to China's sustainable financing agenda is China's leadership in the financing of infrastructure projects among Asian countries and other countries with which it closely trades. Here again, RMB financing can greatly assist in achieving these goals, says Huo Rongrong, global head of China and RMB business for capital financing at HSBC, who is responsible for all primary market RMB products.

China has played a key role in the formation of new multinational institutions like the Silk Road Fund, Asian Infrastructure Investment Bank and the New Development Bank, so new opportunities abound for China to provide foreign currency and RMB-denominated funding for infrastructure projects in emerging economies.

Just as China's cross-border trade is increasingly denominated in renminbi to reduce financing costs, this also could be the case for infrastructure financing.

Outbound infrastructure investments in yuan fit well with key Chinese strategies such as the Belt and Road Initiative, which helps Chinese companies integrate better with the global economy.

"For example, the Silk Road Infrastructure Fund is likely to co-invest in projects alongside Chinese corporations, and some of these projects could connect with Chinese technology and service sectors, so there is lots of value around the whole project cycle that could be created," Huo says.

cecilyliu@chinadaily.com.cn