A ‘faster, cheaper, effective way’for investors to manage liquidity
Print Edition
CHINA has been promoting international use of the yuan for more than a decade. In the next five years, Shanghai will rise to the challenge of becoming a global financial center in tandem with the currency’s status.
Zhou Xiaochuan, governor of the People’s Bank of China, wrote in an article last week that the yuan will become an international currency by the end of the 13th Five-Year Plan (2016-2020), with the government gradually making the yuan more convertible.
Shanghai Daily sat down with Sridhar Kanthadai, Managing Director and Regional Head of Transaction Banking at Standard Chartered Bank in China and North Asia, to talk about the future of the yuan and the role that Shanghai’s Free Trade Zone will play in its rise.
Q: China last month launched the widely anticipated Cross-Border Interbank Payment System (CIPS) to process international yuan transactions. What is the impact so far?
A: We completed over 200 transactions on the first day of CIPS launch, and the daily volume now is significant. CIPS is the foundation for the internationalization of the yuan. If you talk about using the yuan overseas, whether it’s a bank or a company, the first step is creating offshore centers so that the yuan can be cleared locally. I think a longer-term solution, and a more sustainable one, is having a global clearing system of the yuan. That’s what CIPS is doing. It is similar to the Clearing House Interbank Payment System in the US.
Standard Chartered has led a working group of SWIFT offshore users and engaged with the People’s Bank of China around some global standards that CIPS can adopt. It’s very important that CIPS is not looked upon as a domestic infrastructure, but rather as a global infrastructure for international banks and corporates as well as Chinese customers. It also covers multiple time zones.
Q: How can CIPS drive yuan internationalization?
A: The CIPS infrastructure is to help with payment efficiency. It uses international standards, supporting both English and Chinese users. It helps banks and clients manage different pools of liquidity. Because you’ve got yuan liquidity in different countries, CIPS helps clients move money quickly and efficiently. From a time-zone standpoint, it offers the flexibility to operate on a same-day basis.
Clients have complicated technical infrastructure to pick up payment messages, convert them to Chinese characters and make payments locally. I think CIPS will help remove that inefficient processing, making it faster, cheaper and more effective in managing liquidity. The longer-term goal is to support yuan internationalization, but how you get there is as important.
Q: Will the new clearing system erode the business of current offshore yuan centers?
A: Offshore yuan centers will have their role to play because China still doesn’t have an open and convertible foreign-exchange system. While it is making progress toward capital account convertibility, there are still restrictions. There is a natural need for an offshore market, where the rules and liquidity situations are not the same. It will change over time, and eventually you will find the most efficient way of clearing and managing liquidity is through CIPS onshore in China.
Q: China is undergoing capital outflow pressure this year. Could that undermine financial reforms?
A: When China loosens capital controls, we have to think in two ways. Money will go out, and money will come in. There is a balance to strike. Where I see a lot of opportunities is outbound investment through the various stock connect, mutual fund recognition schemes as well as QDII and its variants. I think the authorities are very open to implementing outbound schemes and in the long-term, they want to support convertibility. They are not overly worried about short-term challenges of cross-border money flows.
Q: What impresses you the most about changes in Shanghai’s Free Trade Zone?
A: Some of the regulatory changes around operational efficiency, netting and payments are very positive for centralized treasury. So is the relaxation of rules allowing Chinese companies to borrow money offshore and use that money onshore. In the past, you could bring in only working capital and the money you brought in could not be used to expunge loans onshore. Changes in this area is a very positive development that allow more companies to benefit from the FTZ opportunity.
Q: What can the free trade zone do to attract more companies to set up treasury centers?
A: When companies consider local or regional treasury centers, they firstly look for consistency and clarity in rules and regulations. Secondly, they want an open system with less capital controls. For example, you can do hedging and non-deliverable forwards. You may find the development of financial products hinges upon the ability to have a transparent and consistent legal framework as well as lower level of capital controls. The third consideration is a suitable location with access to the market you want to manage. Shanghai is well located and the domestic market is very huge and important to many companies.
Therefore, having a treasury center in China would make sense. The fourth factor is how treasury activities are taxed. As you consolidate all treasury activities into one location, the volume of activities and profit generated will be higher. People will look at how you tax the treasury activities. That will be a factor, but not a driver.
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