RMB internationalization moving backwards – Natixis

Alicia Garcia Herrero, Research Analyst at Natixis, explains that RMB internationalization, which was high among the government - and specially the PBoC’s - priorities prior to the horrible summer of 2015, is moving backwards.

Key Quotes

“After an epic increase in the use of RMB as a payment currency internationally, strong headwinds ahead

The use of the RMB as a medium of exchange increased substantially since 2012 until 2016, particularly in the private sector domain. Payments settled in RMB via SWIFT stood at negligible 0.05% of total back in 2010 but then skyrocketed to 2.79% in August 2015. Since then, depreciatory pressure on the RMB is one of the key factors for a clear reversion of trend. In fact, RMB settlements have fallen around 20% last year (from RMB 9.7 trillion to 7.7 trillion). Across payment types, trade-related payments have been used most extensively, followed by those related to foreign direct investment (FDI) and outward direct investment (ODI).”

“RMB-denominated assets less favored by foreign entities 

RMB has been gaining importance as store of value, albeit from very low levels, until the summer of 2015. In fact, the amount of RMB assets held by overseas investors marginally crossed the RMB 3 trillion threshold (USD 430 billion) in 2016, falling nearly 20% compared to 2015. Still, the performance varied starkly across assets: bond holdings have raised to the highest level in years but the sharp decrease in RMB deposits dragged the headline figure. Yet, irrespective of the diverging trends, there is one thing in common – assets held by foreigners as a share of total China’s market size are still very low across all assets (Deposit and loan: 0.6%; Equity: 0.8% and Bond: 1.9% in 2016), showcasing foreign investors’ lukewarm response against Chinese government’s efforts to put up schemes like RQFII, Stock Connects and Mutual recognition of funds to lure inflows.” 

“Hard life for RMB offshore centers, especially for Hong Kong

Alongside RMB depreciation, offshore centers, inevitably, have seen their importance decreased. The most obvious example of it is the shrinking amount of RMB deposits offshore, and especially in Hong Kong. Only Taiwan has continued to maintain a stable amount of RMB deposits. In Hong Kong, RMB deposits have move from a share of 12.8% of total deposits at the peak in March 2014 to 4.7% of total deposits in March 2017. RMB trade settlement and clearing also shrank but the amount of outstanding loans is hovering at the highest value in years (but dropping as a share of total).”

“All in all, the progress of RMB internationalization is clearly retreating, especially its functions as medium of exchange and store of value, which were the most important. The developments apparently look brighter for standard of deferred payment (bond issuance) as the Chinese government has proactively stepped up efforts to attract capital inflows into the rapidly growing bond market – with the latest China-Hong Kong Bond Connect as the best illustration.”