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Home » Supplement » Lujiazui finance fair
Offshore yuan trading opens broad new horizons
June 29, 2012, Friday
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Print Edition
Print Edition
MATTHEW Phillips, Leader of Financial Services M&A of PwC China, talked with Shanghai Daily about business opportunities brewing from increasing international use of the yuan and opening capital market. He pointed out advantages and challenges of Shanghai among the global network of financial centers.
Q: London has recently become an offshore center for yuan transactions. What impact will that have on the internationalization of the Chinese currency?
Offshore yuan should be looked at as a whole instead of looking separately at London or Hong Kong. China couldn?t keep on òsterilizingó all foreign currency coming onshore, so it had to allow some of the business to be handled offshore. The logical place to start was Hong Kong. By allowing the yuan offshore and doing it in a manageable way, China can manage domestic liquidity and it can also develop the yuan as a reserve currency ultimately.
This creates an opportunity for markets like London, New York and Singapore. London is home to more than a third of global transaction of foreign exchange, so it is logical for that city to play a role in the yuan business. It also suits time zones because it extends the period of trading in the yuan beyond the availability of Hong Kong and Singapore. The next logical step will be New York, completing the 24-hour time cycle.
Q: Will London take money from Hong Kong?
I don?t see money shifting all of a sudden. London and Singapore or New York will naturally act as settlement hubs for some yuan-denominated transactions. Over time, when buyers and sellers get used to using the yuan and yuan transactions grow. Hong Kong had 554 billion yuan (US$87.9 billion) deposits at the end of March, and that trend will continue in other offshore markets.
Q: When will New York join as an offshore center?
If London is successful, logically you will need an asset center in the US in order to complete the loop. If demand is there to trade the currency outside the windows of Hong Kong and London, other markets will follow suit. Demand in London is not because of policy. It?s because there are opportunities for investors and for the city itself to get involved in trading yuan. They are serving customer needs. If clients want to trade in yuan and they cannot offer it, they lose their business. Not being able to offer settlement in yuan would ultimately be a disadvantage for New York.
Q: What is limiting transaction volumes in offshore yuan centers?
China wants to release liquidity, but for a couple of reasons, it doesn?t want to completely liberalize the exchange-rate mechanism. The growth of the offshore market will lead to convertibility, and that?s why China wants to control the volume of the deposits and the emergence of products.
There is increasing evidence that buyers and sellers see less risk in pricing their goods and settling in yuan. Large companies that utilize the yuan would benefit the most. But small companies that are only buying and not selling could end up holding yuan deposits they don?t really need. There are channels such as the RMB Qualified Foreign Institutional Investors program, but there is no clear route to repatriate yuan back onshore. If a stable, liquid market evolves over time, with a manageable impact on the exchange rate, it will allow the yuan to become fully convertible. But that will be a long process.
Q: If the onshore market is not likely to be fully developed before the yuan is convertible, what role will Shanghai play during the internationalization?
A corporate in China is much more comfortable and likely to have a market for its yuan-denominated assets in Shanghai than in London.
Will they still go to London? Yes, London provides a customer basis they could not otherwise tap. London was chosen because it is a mature market and has expertise infrastructure to offer foreign issuers what they can?t do in Shanghai.
Shanghai has key advantages as the yuan become more fully convertible. Shanghai will be a natural home for people wanting to raise equity and debt in yuan.
Q: If domestic capital market becomes developed and the offshore yuan is rushing to buy domestic assets, will that work against the aim of yuan internationalization, which is targeted at letting the yuan out?
If it results in the yuan bonds being issued onshore and the yuan flowing back to the domestic market, you have not achieved that object. That?s why the amount of repatriation is carefully controlled right now. As the liquidity position in China changes, there will be circumstances where control of cross-border flows becomes less desirable.
What you are looking for is to have yuan-denominated assets that people are willing to hold and with a value beyond just repatriating back to China.
Gradually, as volume builds, other assets and financial products will evolve. Things like currency funds, hedges, swaps and other yuan-denominated financial derivatives will emerge.
Q: London has recently become an offshore center for yuan transactions. What impact will that have on the internationalization of the Chinese currency?
Offshore yuan should be looked at as a whole instead of looking separately at London or Hong Kong. China couldn?t keep on òsterilizingó all foreign currency coming onshore, so it had to allow some of the business to be handled offshore. The logical place to start was Hong Kong. By allowing the yuan offshore and doing it in a manageable way, China can manage domestic liquidity and it can also develop the yuan as a reserve currency ultimately.
This creates an opportunity for markets like London, New York and Singapore. London is home to more than a third of global transaction of foreign exchange, so it is logical for that city to play a role in the yuan business. It also suits time zones because it extends the period of trading in the yuan beyond the availability of Hong Kong and Singapore. The next logical step will be New York, completing the 24-hour time cycle.
Q: Will London take money from Hong Kong?
I don?t see money shifting all of a sudden. London and Singapore or New York will naturally act as settlement hubs for some yuan-denominated transactions. Over time, when buyers and sellers get used to using the yuan and yuan transactions grow. Hong Kong had 554 billion yuan (US$87.9 billion) deposits at the end of March, and that trend will continue in other offshore markets.
Q: When will New York join as an offshore center?
If London is successful, logically you will need an asset center in the US in order to complete the loop. If demand is there to trade the currency outside the windows of Hong Kong and London, other markets will follow suit. Demand in London is not because of policy. It?s because there are opportunities for investors and for the city itself to get involved in trading yuan. They are serving customer needs. If clients want to trade in yuan and they cannot offer it, they lose their business. Not being able to offer settlement in yuan would ultimately be a disadvantage for New York.
Q: What is limiting transaction volumes in offshore yuan centers?
China wants to release liquidity, but for a couple of reasons, it doesn?t want to completely liberalize the exchange-rate mechanism. The growth of the offshore market will lead to convertibility, and that?s why China wants to control the volume of the deposits and the emergence of products.
There is increasing evidence that buyers and sellers see less risk in pricing their goods and settling in yuan. Large companies that utilize the yuan would benefit the most. But small companies that are only buying and not selling could end up holding yuan deposits they don?t really need. There are channels such as the RMB Qualified Foreign Institutional Investors program, but there is no clear route to repatriate yuan back onshore. If a stable, liquid market evolves over time, with a manageable impact on the exchange rate, it will allow the yuan to become fully convertible. But that will be a long process.
Q: If the onshore market is not likely to be fully developed before the yuan is convertible, what role will Shanghai play during the internationalization?
A corporate in China is much more comfortable and likely to have a market for its yuan-denominated assets in Shanghai than in London.
Will they still go to London? Yes, London provides a customer basis they could not otherwise tap. London was chosen because it is a mature market and has expertise infrastructure to offer foreign issuers what they can?t do in Shanghai.
Shanghai has key advantages as the yuan become more fully convertible. Shanghai will be a natural home for people wanting to raise equity and debt in yuan.
Q: If domestic capital market becomes developed and the offshore yuan is rushing to buy domestic assets, will that work against the aim of yuan internationalization, which is targeted at letting the yuan out?
If it results in the yuan bonds being issued onshore and the yuan flowing back to the domestic market, you have not achieved that object. That?s why the amount of repatriation is carefully controlled right now. As the liquidity position in China changes, there will be circumstances where control of cross-border flows becomes less desirable.
What you are looking for is to have yuan-denominated assets that people are willing to hold and with a value beyond just repatriating back to China.
Gradually, as volume builds, other assets and financial products will evolve. Things like currency funds, hedges, swaps and other yuan-denominated financial derivatives will emerge.
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