Comments on Settlement Infrastructure for Local Currency Internationalization by Changyong Rhee and Lea Sumulong Paper

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Comments on Settlement Infrastructure for Local
Currency Internationalizationby Changyong Rhee
and Lea Sumulong Paper

• R. Sean Craig
• IMF Resident Representative in Hong Kong
• HKIMR Conference on Currency Internationalization
• Hong Kong, December 11th, 2012

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If you build a state-of-the-art RMB settlement
system will they come?
What role does the settlement system play in RMB
Internationalization?
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RMB Internationalization in Hong Kong depends on
Mainland Chinas capital account opening

• Partial opening of the capital account supported
  development of offshore RMB products and markets
• Supply of offshore RMB liquidity (i.e. RMB
  deposits) created by outflows from mainland (i.e.
  trade settlement)
• Usage of offshore RMB boosted by opening up of
  FDI channel to mainland and R-QFII
• Offshore RMB markets critical to trade and manage
  risks needs infrastructure to support liquidity
• Full convertibility unnecessary but some cross
  border flows and arbitrage needed to sustain
  market development
• Infrastructure for RMB settlement important but
  what else is needed?

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Focus of Chinas capital account opening shifts
to liberalizing cross-border RMB flows ...

• 2007 Mainland financial institutions allowed to
  issue RMB-denominated bonds in HK subject to
  approval
• 2009 RMB cross-border trade settlement
• 2010 Foreign companies can issue RMB- bonds in HK
• 2011 RMB FDI and ODI
• 2012 Qianhai Shenzhen-Hong Kong Cooperation Zone
  will allow HK banks to lend directly to mainland
  firms

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Hong Kong RMB deposit growth surged early but has
since levelled off as RMB trade settlement
stabilized
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The share of trade settlement in RMB has levelled
off as volatility makes it riskier to denominate
trade in RMB
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Banks have issues CDs that have absorbed deposits
flows as they increase RMB lending (68 bn,
end-Sept)
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Issuance of RMB Bonds surges while banks issue
RMB CDs to raise funds for RMB lending
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RMB denominated FDI to the mainland has surged
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The creation of the RMB QFII also boosted RMB
portfolio flows from Hong Kong to the Mainland
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Measures supported RMB internationalization
Sources of RMB funds Uses of RMB funds
2004 Deposits, exchange individuals, designated merchants 2009 RMB trade settlement 2010 RMB CDs, FI accounts 20102012 trade settlement expanded 2011 CNs ODI settled in RMB 2012 RMB LTD ratio relaxed 2012 RMB liquidity facility at HKMA 2012 RMB deposits for non-residents 2004 Exchange, remittance 2007 RMB bonds 2010 RMB loans to corporates 2010 Pilot scheme to invest in Mainland interbank bond market 2011 Stock listing in RMB 2011 RMB FDI 2011 RMB Loans relating to CNs ODI 2012 RMB QFII A-share ETF 2012 Qianhai plan allowing HK banks to lend from HK to CH
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Volatility in CNH-CNY differential reflect
incomplete financial integration in offshore and
onshore market
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Volatility in CNH-CNY differential reflect
incomplete financial integration in offshore and
onshore market
Short term capital inflows to China and the
CNY-CNH basis
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Challenges for RMB internationalization remain

• RMB internationalization has depended on measures
  expanding cross border flows of RMB
• Demand for offshore RMB financial products
  healthy, but
• RMB liquidity in Hong Kong is tightening as both
  RMB deposits and trade settlement volumes have
  leveled off
• Redenomination of trade from dollars to RMB is
  slowed by the difficulty hedging RMB interest
  rate risk
• RMB internationalization must be a market driven
  process, the supporting infrastructure need
  further development