Renminbi Internationalization: Outlook and Offshore Centers
In the first part of this interview, Tse Yung Hoi, deputy chief executive officer of Bank of China International Holdings, discussed the basic concepts, background, and key milestones of renminbi (RMB) internationalization. In this second installment, he and Wendy Guo, CFA, discuss the possible influence that the Renminbi Qualified Foreign Institutional Investor (QFII) and RMB Foreign Direct Investment (FDI) schemes will have on the progress of RMB internationalization after Vice Premier Li Keqiang’s recent visit to Hong Kong and the role that the RMB will play in the global monetary system over the next 5 to 10 years. The following is an English translation of that interview, which was originally conducted in Mandarin Chinese on 15 September 2011.
Wendy Guo: Last month, Vice Premier Li Keqiang [of China] visited Hong Kong and confirmed renminbi QFII [Qualified Foreign Institutional Investor] or RQFII, renminbi FDI [foreign direct investment], and many other measures. How big an impact do you think these will have on the internationalization of the renminbi?
Tse Yung Hoi: I think the two measures are quite important. As I mentioned before, there is a backflow mechanism [to promote] internationalization of the renminbi. You can’t say that the renminbi only flows out of China but never flows back in! For the renminbi outside of China, I think the existence of two environments is very important. First is internal circulation: The renminbi and the domestic economy constitute one type of circulation. As you mentioned just now, this type of circulation includes the policies brought by Li Keqiang, including RQFII, which allows renminbi to flow back from overseas into domestic capital markets through certain channels in limited amounts, such as bond or stock purchases. This is one of [the measures]. Second, as with the U.S. dollar, it is possible to make direct investments using renminbi in China. These direct investments refer to the real economy. Naturally, it is affected by some of China’s industrial policies. For instance, you can’t invest in real estate, stocks, or futures, but investing [renminbi] as capital funding in the real economy is permitted. This kind of internal circulation makes the renminbi more attractive.
Moreover, a long period of time exists between first and second IPOs in renminbi. With the emergence of renminbi FDI — because FDI is capital funding, domestic capital funding — you need to make a long-term capital investment. If you issue two-year bonds [in Hong Kong] and invest in a China-based enterprise as capital funding, how would you make repayments after two years? The enterprise might have just started up, and it might not be profitable yet. So, it is impossible to sell off the enterprise to make bond repayments, right? Therefore, I believe the emergence of FDI is going to benefit Hong Kong’s renminbi IPO market and stimulate the development of the market here.
In addition, there is the external [outside China] circulation of renminbi. Say, for instance, a foreign enterprise conducts a renminbi IPO or issues bonds in Hong Kong and takes the money abroad for other purposes, which could be trade settlement. (This trade does not necessarily involve cross-border settlement with China, as it could possibly be trade between Vietnam and Laos, which could also use renminbi for settlement, right?) This kind of external circulation is also very important.
As for Hong Kong as an offshore market, for instance, Singapore and London can also serve as offshore markets, although these [markets] don’t have such an array of diversified products, such strong support from the Chinese government, and such close relationships with the Chinese economy as Hong Kong. So, these [other markets] will ultimately become subcenters that have certain connections [with Hong Kong]. I believe this will still benefit the future development of the renminbi.
Apart from Hong Kong, will there be large-scale development of other offshore centers for the renminbi?
I think it depends on the next step of development of the renminbi. At present, the volume of overseas renminbi is still mainly concentrated in Hong Kong. In the future, I think Singapore may become a second offshore center, and London a third. Some other cities may also become centers for the renminbi. But their products, investment channels, and internal circulation with China are never going to match the size of those of Hong Kong.
In the next 5 or 10 years, how do you think the global monetary system will evolve? What role will the renminbi play in such a system?
Everybody is now making predictions in this regard. My prediction is that, according to a World Bank research report, the renminbi will become the third most widely used settlement currency globally by 2025. Bloomberg also recently conducted an online questionnaire survey of 1,300 economists and analysts, and most of them believed that the renminbi would become the third most widely used currency of settlement by 2020.
On this point, I don’t have a specific time-based analysis. But I think this depends more on development of the Chinese economy. I estimate that assuming China’s GDP, which amounted to 5.8 trillion U.S. dollars last year, will grow at an annual rate of 7% in the next 10 years (this is real GDP, in renminbi terms) and the renminbi exchange rate to the U.S. dollar will rise by 5% each year, then [China’s] real GDP, in U.S. dollar terms, is going to register annual growth of 12%.
But if the American economy grows at a rate of 3% per year, and considering that [the GDP of] the U.S. is 14.3 trillion U.S. dollars and [the GDP of] China is 5.8 trillion U.S. dollars for last year, in 10 years, the two countries will have essentially the same economic scale, or [GDP of] slightly over 19 trillion U.S. dollars. So, this is an important piece of data.
However, of course, for the renminbi to become the third most widely used settlement currency, on the one hand, we still need to wait for [further improvements] of [China’s] overall economic strength, right? On the other hand, in this process, [measures] are needed to gradually shift [the renminbi] from a settlement currency to an investment currency. During this period, [China] will gradually open its capital markets. By 2020, they may not be fully open, but will surely be more open than they are today. Another point is that the exchange of renminbi, [by then] it will become more . . . the exchange rate will become more . . . transparent.
Will interest rates become more market oriented? Will the mode of [China’s] overall economic development improve further, compared with today, so that GDP can grow in a more stable, sustainable, and reasonable manner? Will the industrial structure become more reasonable? Will the central government’s macroeconomic regulatory measures become more market oriented? Will [China’s] investment banking sector develop faster? Will aspects from mixed industrial operations to the regulatory system become further enhanced?
These comprehensive factors will determine the progress of the renminbi in the process of internationalization . . . That’s what I think. I feel optimistic about it because Europe, the U.S., and Japan are facing a lot of structural problems that are difficult to overcome, particularly their debt problems arising from their fiscal deficits. It is very, very difficult to overcome such deficits unless you ultimately keep printing money. The U.S. [has started] doing it, and I think the European Central Bank is looking to do the same. They [the Europeans] are also going to print money if they find no other solution.
At this time, Japan’s debts are primarily from domestic sources, which need to be supported by domestic deposits. Its deposit rate keeps decreasing, from the peak of 30-some percent down to only 18% and to only 5.5% now. So, after a few years, when the deposit rate falls to a certain level, what will happen when domestic deposits cannot support [Japan’s] fiscal deficits?
So, I feel [these countries] are all facing structural problems and are struggling to overcome them. There are also the problems of aging. And the exodus of industries and manufacturing, which means that [Japanese companies may have] earnings from consolidating [foreign operating subsidiaries] but [the government] receives no taxes! The manufacturing sector has been relocated to Indonesia and China. The taxes are paid in Indonesia and China.
Toyota makes lots of money. It produces [cars], but it does not pay taxes to Japan!
Population aging [in Japan] also brings two problems: One is that welfare, medical care, and insurance expenses will increase; two is that their investment tendencies will become conservative, leading to languishing real estate and stock markets, and the economy will lack vibrancy. What Japan has encountered is now emerging in Europe and the U.S.
Therefore, it should be said that this offers a very good opportunity for internationalization of the renminbi, and we must take hold of this opportunity to promote internationalization of the renminbi. Otherwise, China holds foreign exchange reserves equivalent to 3.2 trillion U.S. dollars in U.S. dollars, euros, yen, and pounds sterling; these currencies will possibly depreciate because of debt problems, and if the debt problems are not resolved, everyone will keep printing money! The internationalization of the renminbi is the best way for China to safeguard the renminbi and its financial assets.
Mr. Tse, thank you for sharing with us your views about the internationalization of the renminbi. Thank you very much!
Thank you, Wendy!