New developments accelerateRenminbi internationalisationJuly 2013

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

China – steps towards greater RMB convertibilityfor capital accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 3

Hong Kong – looks to cement its top spot . . . . . . . . . 5

Taiwan – strong appetite for RMB . . . . . . . . . . . . . . . 6

Singapore – a clear leader in South East Asia . . . . . . 7

Australia – promoting its trading relationshipwith China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Europe – a hub away from home . . . . . . . . . . . . . . . 9

Developments in the United States . . . . . . . . . . . . . . 11

Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

cont

ents

3New developments accelerate Renminbi internationalisationJuly 2013

Recent developments in the People’sRepublic of China (China)1 and around theglobe indicate that the internationalisationof the Renminbi (RMB) is moving forwardrapidly. As highlighted in previous clientbriefings2, the rise of offshore RMB and itsemergence as an increasingly globalcurrency has benefitted companies andfinancial institutions in and out of China.The following statistics are goodillustrations of the RMB’s growth3:

n the value of payments using RMBgrew by 171% in a year, from January2012 to January 2013; and

n the ranking of RMB as a paymentcurrency jumped from 20th place to13th place from January 2012 toMarch 2013, pushing it pastcurrencies like the New Zealand Dollarand the Russian Rouble.

China continues to accelerate regulatoryreforms to liberalise the currency andnations throughout the world have beenembracing this fast pace of reform bypriming their financial markets to takeadvantage of the rapid RMB growth. Withthe ongoing plans of China to graduallydevelop the RMB into a global currency,major financial centres worldwide haverecognised opportunities to participate in,and enjoy, the financial benefits of theinternationalisation of the RMB. This clientbriefing highlights important recentdevelopments in China, Asia Pacific,Europe and the United States.

China – stepstowards greater RMBconvertibility forcapital accounts

China government’s approachtowards RMB internationalisation

Our focus begins in China, as regulatorsthere naturally have the most directinfluence over the development of RMBas a global currency.

At an executive meeting chaired byPremier Li Keqiang on 6 May 2013, theState Council stated that its objectives for2013 include:

n putting forward more reform initiativesto liberalise interest rates andexchange rates;

n working out an operational plan tomake RMB fully convertible undercapital accounts; and

n establishing a system that allows foroutbound investment by individuals.

Although the meeting shed little light on thedetails of how these reforms would beimplemented, these proposals indicate thatthe central government is reform-minded infurther internationalising the RMB and hasset out specific steps to realise this goal.

These initiatives would require China tofundamentally restructure its system ofcapital controls and further open up itsdomestic financial markets. To this end,various regulators such as the People’sBank of China (PBOC) (which regulatesinterest rates and RMB accounts), theState Administration of Foreign Exchange(SAFE) (which regulates foreign exchangecontrols), and the Ministry of Commerceand the National Development andReform Commission (both of whichregulate overseas direct investment),

New developments accelerate Renminbiinternationalisation – Perspectives fromClifford Chance’s global network

1 For the purpose of this client briefing when we refer to China we mean People’s Republic of China not including Hong Kong, Macau and Taiwan2 See for example Clifford Chance client briefings entitled “Renminbi Internationalisation – The London Perspective” (May 2012) and “Renminbi Internationalisation – Market

and regulatory developments over the past three years” (May 2012) 3 SWIFT Monthly RMB Tracker – February 2013

“Although internationalising RMB may seem desirable,the process is laden with risk. Therefore, ever since1996 when RMB became convertible under currentaccounts, the government leadership has been verycautious and prudent in the process of currency reform.It is very likely that the government will adopt certainphase-in procedures in the contemplated plan and mayadjust its policies where appropriate going forward.”Tiecheng Yang, Partner, Regulatory, Beijing

© Clifford Chance, July 2013

among others, will need to coordinateamong themselves to develop concreteimplementation plans. The new measuresare also intended to curb speculation onthe currency.

These initiatives are in line with theprevious “step-by-step” approachoutlined in the Twelfth Five-Year Plan forFinancial Development and Reform(unveiled by China’s financial regulators inSeptember 2012) and the report for the18th National Congress of theCommunist Party of China (November2012), which stressed that freeconvertibility of RMB capital accountsshould proceed on a step-by-step basis.

The pace of reform towards full RMBconvertibility may still be gradual in thenear term, and Zhou Xiaochuan, thegovernor of PBOC, has confirmed thatRMB convertibility under capital accountswill not necessarily implicate 100%convertibility or a free-flowing currency.

However, Premier Li’s words have shownthe State Council’s willingness to pushforward with its reforms at a pace it iscomfortable with, and reflects thepotential for further liberalisation of thecurrent regulations in a bid to promoteeven greater use of RMB globally.

Expansion of QFII, RQFII and QDIIProgrammes in China

In an important move to hasten RMBconvertibility under capital accounts,China’s regulators have actively workedon expanding certain existingprogrammes, including the QualifiedForeign Institutional Investors (QFII)programme, the RMB QualifiedInstitutional Investors (RQFII) programmeand the Qualified Domestic InstitutionalInvestors (QDII) programme, to encourageinbound and outbound capital flowsbetween securities markets. Since late2012, several new rules and amendmentshave been introduced to the QFII andRQFII programmes to lower the thresholdrequirements for licence holderqualification, expand the investmentscope and streamline the fund transferprocess under such programmes.

In particular, the China SecuritiesRegulatory Commission (CSRC)published a consultation draft on14 March 2013 to amend the currentQDII regulations with the aim of attractingmore domestic participants by removingthe relevant financial requirements to thisprogramme. Aside from the build-up of amore investor-friendly legal framework,China’s regulators have also been steadily

boosting quotas for the QFII, RQFII andQDII programmes. In just a year4, theaggregate QFII quotas increased toUS$41.882 billion compared toUS$26.13 billion; the aggregate RQFIIquotas more than doubled to RMB76.3billion from RMB20 billion; and theaggregate QDII quotas increased fromUS$76.447 billion to US$85.027 billion.

China’s regulators have also started tofocus their attention on developinginbound and outbound securitiesinvestment by individual investors. In earlyApril 2013, Hong Kong, Macau andTaiwan residents and foreign individualsworking and living in the mainland becamethe first group of individual investors(without Chinese citizenship) permitted todirectly open accounts to trade A sharesand purchase mutual funds. Further,officials at CSRC and SAFE have indicatedthat there have been internal discussionson plans to launch “QFII2” and “RQFII2”programmes, although there is nodefinitive timeline for these plans. If bothprogrammes get the go-ahead, offshoreindividual investors would be able todirectly access China’s securities market inthe same manner as existing QFIIs andRQFIIs. In January 2013, PBOCannounced plans to launch the QDII2programme this year. When thisprogramme comes into effect, certainqualified domestic individuals will bepermitted to invest in offshore securitiesmarkets (likely through Chinesesecurities companies).

Parallel to the Chinese centralgovernment’s initiatives mentionedabove, regional authorities, such as thelocal Shanghai government, have beenworking on pilot schemes, including theQDLP (Qualified Domestic LimitedPartner) pilot programme permittingforeign hedge funds to establish apresence in Shanghai to raise RMB andsubsequently convert the RMB into USD

4 New developments accelerate Renminbi internationalisationJuly 2013

4 These figures are from 30 April 2012 to 30 April 2013.

© Clifford Chance, July 2013

to invest offshore. Local authorities inQianhai (a special zone in Shenzhen,which is geographically close to HongKong) are similarly experimenting with alocal QDLP pilot programme. Theselocal initiatives will further boost thepace of internationalisation of RMB fromwithin China.

Hong Kong – looks tocement its top spot

On 25 April 2013, the Hong KongMonetary Authority (HKMA) announcedmeasures that will significantly liberalisethe market for RMB in Hong Kong. Theannouncements aim to confirm HongKong’s market leading position as anoffshore RMB hub. We set out the keyelements of these measures below:

Flexible Net Open Positions inHong Kong

The HKMA announced that it wouldallow banks to determine their own limitson RMB Net Open Positions (NOP)5,removing the current mandatory limit of20%. Any bank wishing to maintain aRMB NOP limit above the 20%threshold must first inform anddemonstrate to the HKMA that the moveis prudent and appropriate for the scaleand nature of its business.

Historically, the HKMA has regulated thisarea carefully, relaxing RMB NOP limits ata gradual pace. For instance, inDecember 2011, the HKMA imposed a10% limit on Hong Kong banks’ NOP.This limit was increased to 20% inJanuary 2013.

The HKMA’s justification for removingthe current limit is to allow Hong Kongbanks to manage their own risk andexposure in the offshore RMB market.In addition, the removal of this limitshould allow banks to take largerpositions and enhance market liquidityin offshore RMB.

HKMA removes Minimum LiquidityRatio Limit for RMB

The HKMA has removed the minimumliquidity ratio of 25% for offshore RMB.This minimum liquidity requirement wasdesigned to prevent a surge in RMBbusiness by banks following their entryinto the RMB market and meant thatbanks had to hold a certain amount ofassets, such as cash against theirexposures to the RMB. Thisdevelopment means that banks can nowtreat RMB currency deposits in thesame way they treat other currencies,and do not need to maintain additionalreserves in cash. The move is aimed atreleasing more offshore RMB into theinterbank system which will improve theliquidity of the currency. This is expectedto lead to lower borrowing costs and tofacilitate the growth of the use of thecurrency for various financial products.

Hong Kong creates an RMBinterbank rate

The Treasury Markets Association of HongKong (TMA) has, since 24 June 2013,been providing daily benchmark RMBinterest rates covering eight tenors, fromovernight to up to one year6. These rateshave been termed the CNH Hong Kong

Interbank Offered Rate, or CNH HIBOR.

The TMA has appointed 16 banks tocontribute their interest rate quotes basedon their activity levels in the Hong Kongoffshore RMB market. The CNH HIBORrates will then be calculated by averagingthe middle quotes, with the three highestand three lowest quotes excluded fromthis calculation.

The move is expected to boost thedevelopment of offshore RMB products thatrely on interest rates, for examplesyndicated loans. Additionally, it shouldhave a positive impact on the use ofderivatives to improve the risk managementof businesses that have exposure to RMBby allowing the development of moresophisticated hedging products, especiallyon interest rates.

The move should also promote thegrowth of the offshore RMB loan marketas the interbank rates are be designed toprovide a reliable benchmark for pricingloan facilities and to boost transparencyamong financial institutions.

Investors still hungry for Dim Sumbonds in Hong Kong

The appetite for Dim Sum bondscontinues, with both China-centred

5New developments accelerate Renminbi internationalisationJuly 2013

5 A bank’s NOP is the difference between the assets and liabilities on its balance sheet.6 The planned CNH HIBOR fixing will include tenors of overnight, 1 week, 2 weeks, 1 month, 2 months, 3 months, 6 months and 12 months.

© Clifford Chance July 2013

“We can expect the relaxation of these rules to increasethe use of RMB by Hong Kong banks by increasingliquidity and reducing balance sheet constraints. Theserestrictions were initially imposed by HKMA to makesure that banks didn’t rush into RMB business withoutappropriately managing their balance sheet and theirRMB liabilities. This development indicates a maturing ofthe Renminbi as a currency in Hong Kong as Renminbibecomes more widely used.”Francis Edwards, Partner, Derivatives, Hong Kong

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corporates and banks, as well ascompanies and financial institutionsbased across (and outside) the AsiaPacific region looking to tap RMBliquidity to achieve attractive fundingcosts. As the initial wave of Dim Sumbonds mature, many issuers areconsidering re-financing these bonds.

China-based issuers continue toexplore a number of structures,including letters of support, keep-wellarrangements, letters of credit andequity purchase undertakings, toprovide credit enhancement to offshorebond issuances, for which creditsupport from onshore operations isdifficult to obtain due to the regulatoryconstraints. However, approvals fromChina’s National Development andReform Commission have been issuedto a select few large state-owned

companies, enabling them to issueoffshore bonds directly without theneed to have offshore SPV/issuers andother credit enhancements. CliffordChance recently acted for ChinaMinmetals on its issuance of acombined RMB18.5 billion worth ofoffshore RMB-denominated Dim Sumbonds in Hong Kong, one of four largestate-owned companies that recentlyobtained approval for direct issuancefrom China’s National Development andReform Commission.

Taiwan – strongappetite for RMB

Taiwan develops RMB*clearing capability

On 25 January 2013, Taiwan and theMainland governments signed theCurrency Clearing Agreement, with TheBank of China, Taipei Branch, being

“Aside from adding a fresh source of RMB liquidity, themove to make Taiwan the second offshore RMBfinancial centre is part of a much broader effort by theTaiwan and Mainland governments to stabilise relationsand deepen economic ties following decades of politicaldispute. Therefore, how to maintain stable andsustainable cross-strait relations – both political andeconomic – will become a vital challenge for Taiwan.”Tiecheng Yang, Partner, Regulatory, Beijing

New developments accelerate Renminbi internationalisationJuly 2013

© Clifford Chance, July 2013

Views from Hong Kong

Anthony Wang, a partner in thefinance team of the Clifford ChanceHong Kong office, comments that:“For a long time the market has beenlacking a reliable benchmark interestrate for offshore Renminbi. This mayprove to be a significant step in thedevelopment of Renminbi as acurrency for offshore financing andother financial products”.

Connie Heng, a partner in the capitalmarkets team in the Clifford ChanceHong Kong office comments: “Weexpect this new benchmark rate tospur the development of a market indim sum bonds with floating ratecoupons. Up to now the vast majorityof dim sum bonds have been fixed rateissuances and we expect that someissuers, for example financialinstitutions, may prefer to issue floatingrate bonds referencingthis benchmark.”

Francis Edwards, a partner in thederivatives practice of the CliffordChance Hong Kong office observesthat: “Along with the establishmentof a reliable benchmark interest ratefor offshore Renminbi financings, wecan expect this to allow for thedevelopment of the interest rateswap market for offshore Renminbiwhich in turn will allow for efficienthedging of interest rate risk inRenminbi financings. Without such abenchmark, there has been a lack ofliquidity in interest rate and crosscurrency swaps for Renminbi whichhas made interest rate hedgingunattractive. The offshore RenminbiFX derivatives market is now firmlyestablished since it began life in2010 and the development ofinterest rate derivatives is the nextstage in the Renminbi’s evolution asa global currency for financings.”

* Clifford Chance recently co-hosted a roundtable discussion on Chatham House’s latest research paper on the development of the RMB market in Taiwan. This discussionpaper is available online at – http://www.chathamhouse.org/publications/papers/view/192599

“The appetite for Dim Sum bonds continues, with bothChina-centred corporates and banks, as well ascompanies and financial institutions based across (andoutside) the Asia Pacific region looking to tap RMBliquidity to achieve attractive funding costs. As the initialwave of Dim Sum bonds mature, many issuers areconsidering re-financing these bonds.”Matthew Fairclough, Partner, Capital Markets, Hong Kong

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appointed as the RMB clearing bank forTaiwan. Between 6 February and6 March 2013, 46 banks in Taiwan havebeen able to open RMB accounts andaccept RMB deposits. According tolocal reports, initial appetite for RMBwas huge, with more thanRMB1.3 billion deposited into retailaccounts on the first day alone. Thecentral bank of Taiwan has released datawhich indicates that RMB deposits inTaiwan now exceed RMB 60.26 billion.

Formosa bond issue

According to local reports, the TaiwanFinancial Supervisory Commission hasexpressed willingness to promote its RMBbond market. Chinatrust CommercialBank obtained approval to, and issued,Taiwan’s first offshore RMB bond on25 February 2013, with Deutsche Bankopening Taiwan’s RMB market tointernational names with its issue of aRMB1 billion three year bond and aRMB100 million five year bond on 5 June2013. These bonds are referred to asFormosa bonds, after Taiwan’s formername. With China CITIC Bank and FarEastern New Century Corporation havingalso submitted applications to issueFormosa bonds, an increasing volume ofFormosa bond issues over the near futurecan be reasonably anticipated.

Taiwan contemplates RQFII scheme

To boost the two-way flow of RMB, theChina Securities Regulatory Commissionhas responded favourably to launchingthe RMB Qualified Foreign InstitutionalInvestors regime (with an estimatedRMB100 billion quota) in Taiwan in thenear future. This activity is expected tosecure Taiwan’s position as the secondmost important offshore RMB hubbehind Hong Kong.

Singapore – a clearleader inSoutheast Asia

RMB clearing capability arrivesin Singapore

A major development in the offshore RMBmarket in Singapore took place on8 February 2013 when the Industrial and

Commercial Bank of China, Singaporebranch (ICBC) was authorised to act asthe clearing bank for the RMB inSingapore. ICBC may now provide RMBclearing services to participating banksand their customers for the next five years.

Following on from this, the MonetaryAuthority of Singapore (MAS) and PBOCsigned a Memorandum of Understanding(MOU) on RMB Business Cooperation on 2April 2013. Under the MOU, the MAS andPBOC will cooperate closely in reviewingthe conduct of RMB businesses andclearing arrangements in Singapore. Thetwo central banks also agreed to establisha regular dialogue to review RMB liquidityconditions and discuss issues concerningthe stability of the RMB market. The MAS,in May 2013, circulated a consultationpaper on the implementation of the RMBclearing arrangements, inviting commentson its proposed regulation of banksconducting foreign exchange conversionswith RMB. The MAS has now released itsresponse to feedback received on theconsultation, which provides further detailsin relation to the framework for the RMBclearing arrangements in Singapore. As asign of the deepening financial tiesbetween Singapore and China, the MASopened an office in Beijing in May 2013 toreinforce collaboration with key Chineseinstitutions such as the PBOC.

Singapore as the regional RMB FX hub

On 23 May 2013, Deutsche Bank tookadvantage of Singapore’s newly mintedstatus as an RMB clearing centre bybecoming the first bank to complete andclear a SGD/RMB FX spot trade inSingapore. Deutsche Bank has also begunlive pricing for RMB versus local currency

pairs across all of its onshore Asianlocations, including the Hong Kong Dollar,Indian Rupee, Indonesian Rupiah, KoreanWon, Malaysian Ringgit, Philippine Peso,Singapore Dollar, Taiwan Dollar and ThaiBaht. This provides the Singapore financialmarkets with a comprehensive level ofRMB liquidity, and will allow corporations inthe Association of Southeast AsianNations (ASEAN) to hedge their exposureto RMB. This in turn makes RMB moreattractive as a currency for tradesettlement in the region, which furtherpromotes the globalisation of the currency.

This development is especially significantsince China is the largest trading partnerof ASEAN, with China’s imports rising byalmost 70% in the last five years,significantly outpacing imports-growth inany other region of the world.

Lion City bonds

HSBC and Standard Chartered, as of27 May 2013, became the first banks toissue RMB-denominated bonds inSingapore and DBS has closely followedup on these issuances by successfullypricing and issuing its own RMB-

“Singapore’s ability to clear offshore RMB will allow for awider range of RMB-denominated products to beoffered in Singapore, both in the debt and equity capitalmarkets, and this has been shown in the recent LionCity bond issuances. Singapore is well-positioned tobecome a major hub for offshore RMB”.Lena Ng, Counsel, Derivatives, Singapore

New developments accelerate Renminbi internationalisationJuly 2013

© Clifford Chance, July 2013

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denominated bonds as well in Singapore.These bonds have been named Lion Citybonds, arising from the commonreference to Singapore as the Lion City.These banks issued bonds with acombined amount of RMB2 billion. Thebonds are listed on the SingaporeExchange and are cleared throughCentral Depository (Pte) Limited, a unit ofthe Singapore Exchange.

The emergence of Lion City bonds is asignificant step for Singapore’s developmentas an offshore RMB hub as it allows banksand corporates to access the pool ofoffshore RMB in Singapore, instead ofhaving to access the Hong Kong market.

These developments move Singaporeforward in its aim to become a majorRMB hub, as it is only the fourth centre tobe authorised as an RMB clearing centre,after Hong Kong, Taiwan and Macau, andthe first outside greater China.Furthermore, the recent Lion City bondissuances are a milestone in Singaporeproving itself to be a credible offshoreRMB hub with sufficiently deep RMBdeposits to be able to support theoffering of RMB products.

Australia –promoting its tradingrelationshipwith China

Direct convertibility between RMBand AUD

On 9 April 2013, Australia and Chinaannounced an agreement to launch directtrading between the Australian Dollar andthe RMB on the China Foreign ExchangeTrade System and in the Australianforeign exchange market.

The close trade and investmentrelationship between Australia andChina and the support for RMB-denominated trade settlement andinvestment offered by the RMB200billion (A$30 billion) bilateral currencyswap entered into in March 2012between the PBOC and the Reserve

Bank of Australia (RBA) – the fourth-largest bilateral currency swap Chinahas signed and one of the first to beagreed with a Western economy – hasmade the Australian Dollar a naturalcandidate to be paired with the RMB.

In an important symbolic step towardsRMB internationalisation, the Australiandollar becomes just the third majorcurrency to be directly traded with theRMB (the other two being the US Dollarand the Japanese Yen). ANZ andWestpac Banking Corporation designatedby the PBOC as among the market-makers in the new currency pair supportAustralian dollar liquidity for trading inChina through their China branches, whilebranches of Chinese banks in Australiaprovide RMB liquidity for trading inAustralia. Since the commencement ofdirect trading, the volume of tradebetween the Australian Dollar and theRMB in the onshore spot market hasincreased substantially, with turnoverrising from the equivalent of US$324million in March 2013 to US$3.1 billion in

May 2013**: this affirms the prospects forthe development of a deep and liquidtrading market between the AustralianDollar and the RMB.

Australia-Hong Kong RMB trade andinvestment dialogue

Direct convertibility was announced onthe eve of the inaugural meeting of theAustralia-Hong Kong RMB trade andinvestment dialogue held in Sydney inApril 2013. The dialogue, announced inJuly 2012 and facilitated by the RBA, theAustralian Treasury and the HKMA, isintended to:

n maximise the opportunities for, andpromote the adoption of, RMBtrade settlement;

n support the development and take-upof RMB-denominated financing andinvestment products; and

n foster closer RMB banking andfinancial links between Australia andHong Kong.

“As the take-up of RMB trade settlement and investment inAustralia increases – as we expect it to rapidly following theannouncement of direct convertibility – so will RMB liquidityand the instruments available for managing currency risk. Weforesee that capital raising by Australian corporates andfinancial institutions in RMB – including in Dim Sum bonds inthe Hong Kong, London (and, ultimately, Sydney) financialmarkets – will follow consequentially from direct convertibility,providing access to alternative financing sources and fundingdiversification opportunities. National Australia Bank’s recentissue of RMB400 million of two year bonds confirms thefunding opportunities for Australian issuers presented by theDim Sum bond market and underscores the strategicimportance for Aussie corporates and financial institutions ofthe RMB as a business currency over the medium term.”Laura Sheridan Mouton, Counsel, Finance, Sydney

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© Clifford Chance, July 2013

** Ballantyne, A., Garner, M. and Wright, M., Developments in Renminbi Internationalisation, Reserve Bank of Australia Bulletin (June 2013), 65-74.

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This dialogue, which brings togetherAustralian and Hong Kong seniorbanking and business leaders andofficials from central banks and financeministries, seeks to develop offshoreRMB business opportunities whilepromoting Sydney as an offshore RMBhub within the regional ‘hub and spoke’network of which Hong Kong isthe centre.

The next Australia-Hong Kong RMB tradeand investment dialogue will be held inHong Kong in 2014.

Sydney as a regional offshoreRMB hub?

While the extent to which Sydney developsas an offshore RMB hub will depend onChina’s policy, increasingly close economicand political ties between Australia andChina – the bilateral currency swap, directconvertibility, the RBA’s recentannouncement of its intention to investaround 5% of its foreign reserves inChinese government bonds, and thestrategic partnership between China andAustralia announced in April 2012 – crediblysuggest that China may be willing tosupport Sydney’s development as afinancial market within the network ofoffshore RMB hubs.

Leaders of Australian corporates andfinancial institutions are actively promotingstrategic adaptation and productinnovation to allow Australian businessesto grasp the potentially enormousopportunities presented by Sydneyserving as a regional financial centrebuilding access to Asian financial capitalmarkets as offshore RMB capitalaccumulation accelerates. The AustralianTreasury and the RBA are also supportinga joint research project on theinternationalisation of the RMB beingundertaken by the Centre for InternationalFinance and Regulation in collaborationwith the Shanghai University of Financeand Economics. The joint researchproject will examine reforms to Australia’s

regulatory system that might facilitate thedevelopment of an Australian RMB hub.

Europe – a hub awayfrom home

While Asia Pacific has been activelysupporting the development of the RMBas a global currency, Europe alsorecognises the importance of thisdevelopment. Major financial centresacross Europe also see this as a goodopportunity to ride the wave of theChina growth story. London was thefirst in Europe to take tangible steps toestablish itself as an offshore hub forRMB business with firm support fromboth the UK and Chinese governments7.Being the most international financialcentre in Europe, it realises itspotentially significant role as an activeforeign-exchange and derivativestrading hub in supporting the transitionof the RMB from an international tradingcurrency to an internationalinvestment currency.

Paris has also been vying to become amajor offshore RMB trading hub in theeurozone. According to data cited by aFrench newspaper, the current RMBdeposits level in Paris is aroundRMB10 billion, closely following Londonat approximately RMB14.3 billion8. Almost

10 percent of Sino-French trade is nowsettled in RMB.

There is also Luxembourg, which has theambition to become “a leading RMBoffshore centre in the eurozone in thenear future” as indicated by the Ministerof Finance during a Luxembourg forFinance9 mission to Beijing earlier thisyear. According to data cited byLuxembourg for Finance, Luxembourghas deposits of RMB20 billion as ofJanuary 2013, which is the largest poolof RMB deposits in the eurozone and theLuxembourg Stock Exchange has one ofthe largest RMB denominated bondslisted in Europe. In fact, ICBC hasrecently announced plans to create anRMB cross-border business centre inLuxembourg to cover cross-bordertransactions in Europe, reflecting thesignificance of Europe, and indeedLuxembourg, to China.

Development of currency swapsin Europe

Exactly four months after theannouncement on 22 February 2013,where the governor of PBOC, ZhouXiaochuan, met with the governor of theBank of England, Mervyn King, in Beijingand agreed to facilitate discussions on theestablishment of a reciprocal three-year

New developments accelerate Renminbi internationalisationJuly 2013

© Clifford Chance, July 2013

“This time last year, we published a briefing and noted thatLondon is in pole position to become the offshore RMBhub in the West. A year on, we see other cities in Europepursuing the same goal, some with more determinationand tangible steps. If London doesn’t step forward, it willfall behind. That said; in three to five years time, thedistinction between the offshore and onshore markets maywell disappear, along with the need for “offshore centres”,although competition for business opportunities is wonduring this part of the internationalisation journey.”Yinan Zhu, Senior Associate, Capital Markets, London

7 See Clifford Chance client briefing entitled “Renminbi Internationalisation – The London Perspective” (May 2012)8 The size of the RMB deposits in London has fluctuated significantly during the last year mainly due to a fall in interbank RMB deposits according to a City of London

Corporation report. The London RMB deposit size was up to RMB109 billion in early 2012.9 Luxembourg for Finance is the agency for the development of the financial sector, a public-private partnership between the Luxembourg Government and the Luxembourg

Financial Industry Federation.

RMB-GBP currency swap arrangementthat will allow the British central bank tosupply RMB400 billion to the market, thePBOC and the Bank of England signed anagreement to establish the currencyswap, albeit with a reduced maximumvalue of RMB200 billion.

Since the announcement in February,Paris and Luxembourg have acceleratedthe race with London by becomingincreasingly vocal on the topic of theRMB. For instance, in early April, theGovernor of the Bank of Francecommented: “The Bank of France, withinthe euro system, has been working onways to develop a RMB liquidity safetynet in the euro area with dueconsideration of a supporting currencyswap agreement with the PBOC”.

Market participants are very pleased tosee that London has stepped up to remainin pole position in the race to become theoffshore RMB business centre in Europe.This is of course good news for Londonand UK financial institutions andcorporates, and will be particularlyadvantageous for European companieswho will benefit from using London as ahub for RMB, as it has been for othercurrencies and financial products.

The currency swap will certainlyencourage the use of RMB in Europe asa trade settlement currency as well as aninvestment currency. More importantly, it

will raise awareness and boost marketconfidence in RMB by providing an“official endorsement” from central banksand reassure market participants thatRMB liquidity will remain available.

It is yet to be seen how this swap will beput to use, with the Bank of Englandreferring to it as having “the capability tofacilitate RMB liquidity to eligibleinstitutions in the UK”. Effective andmeaningful use of the swap will be key inpromoting the continued growth of theuse of offshore RMB as intended byPBOC. History has shown that theLondon financial market is a fitting arenawith the financial innovation required toeffectively utilise this swap.

Clearing banks for RMB in Europe

Earlier this year, the chief representativeof PBOC in Europe indicated that thebank would be supportive of Londonhaving its own clearing bank if that iswhat London needs. As with the otherdevelopments in Asia Pacific, internationaland Chinese banks have been eyeingsimilar opportunities and movementsacross the continent, and working behindthe scenes to win the support of Beijingin circumstances where a RMB clearingbank in London may be appointed. Parisand Frankfurt have also expressedinterest in establishing an RMB clearinghouse there.

Development of RMB productsin Europe

The development of RMB-denominatedinvestment products is a key driver in theRMB internationalisation process.Offshore RMB-denominated bonds havegained significant traction, with Frenchand German companies among the mostactive European issuers: with the totalvalue of such bonds issued by Frenchand German corporates reaching nearlyRMB7 billion and RMB8 billionrespectively, in 2011 and 2012.

According to Luxembourg’s Minister ofFinance, Luc Frieden, loans worth RMB30billion are currently structured via

Luxembourg, while the local fund industrymanages RMB200 billion worth of RMBassets. Establishing Luxembourg as a hubfor financial services and how Luxembourgcan contribute to the international reach ofChinese asset managers have been thefocus of Luxembourg’s efforts in theoffshore RMB business.

An MOU was entered into betweenLuxembourg’s Commission for theSupervision of the Financial Sector(CSSF) and China Banking RegulatoryCommission (CBRC) in as early as 2008.This MOU reportedly allows QDIIs toinvest on behalf of their clients in financialproducts regulated by the CSSF. TheMOU positions Luxembourg as agateway to China and also makes itpossible for Luxembourg fundmanagement companies to reachinvestors in the booming Chinese fundindustry through the QDII scheme.

Developments inthe United States

While the United States is not obviouslyseen as a country that actively developsitself as an offshore RMB hub, there havebeen some recent developments whichreflect the growing domestic demand forRMB products. In February this year, theChicago Mercantile Exchange (CME), thelargest futures exchange in the UnitedStates, launched a new offshore RMBfutures contract deliverable in HongKong. This allows market participants tohedge exposure to the RMB as thecurrency further integrates into the globalfinancial system. Furthermore, it is worthnoting that the CME has been acceptingoffshore RMB as collateral for all itsfutures products since January 2012.

Internationalisation of RMB – looking forward

The recent developments in China, AsiaPacific and Europe demonstrate thestrong willingness of many nations tosupport the continuous development ofRMB as a truly global currency. China isthe second largest economy in the world,

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so it comes as no surprise that there hasbeen such a rapid growth of RMB as apayment currency and that it isincreasingly accepted as a majorcurrency in world trade. Major financialmarkets also seem united in their desireto promote and participate inthis development.

A key factor in determining the pace ofdevelopment of RMB as a globalcurrency therefore lies with the RMB-liberalising reforms enacted by China’sregulators themselves. While we do notexpect China to abandon its step-by-stepapproach, it is obvious that these recentdevelopments have increased thespotlight on RMB. At these relatively earlystages of the RMB’s growth, differentcountries have tailored their regulationsand standards separately, with someconcerns being voiced that, in the shortterm, there is a risk of multiple RMBliquidity “puddles” developing in eachhub, causing a divergence of thetreatment of RMB in different parts of theworld. However, one might view this as anatural short-term circumstance in therelatively nascent stage of developmentof RMB as an offshore currency (since itis after all still a currency in respect ofwhich domestic currency controls applyto the extent it crosses China’s borders),and given the active and prudent roleChina’s authorities are playing in the RMB’s continued liberalisation, it is reasonableto be confident that they will be able toeffect a convergence of their regulationsand standards to allow RMB to betreated and valued homogenouslythroughout the world.

It is clear that there are a number ofhurdles China’s regulators have to crossbefore achieving full convertibility of RMB.However, as can be seen from the recentinternational developments of RMB as aglobal currency, this RMB growth story isshowing no signs of slowing, and itseems to be only a matter of time before

the goal of RMB becoming a widely usedglobal currency is achieved. A keyquestion banks and corporates shouldask themselves is whether they arepositioning themselves effectively tobenefit from the growth of RMB.

New developments accelerate Renminbi internationalisationJuly 2013

“The introduction of RMB futures contracts by the CME is auseful step in the wider acceptance of offshore RMBproducts in the United States, the world’s biggest economy.We are closely watching how the United States marketadapts to RMB’s development into an international currency.”Gareth Old, Partner, Capital Markets, New York

12

© Clifford Chance, July 2013

New developments accelerate Renminbi internationalisationJuly 2013

Contacts

TieCheng YangPartner, RegulatoryBeijingE: tiecheng.yang@

cliffordchance.com

Mark ShipmanPartner, FundsHong KongE: mark.shipman@

cliffordchance.com

Anthony WangPartner, FinanceHong KongE: anthony.wang@

cliffordchance.com

Yinan ZhuSenior Associate, Capital MarketsLondonE: yinan.zhu@

cliffordchance.com

Gareth OldPartner, Capital MarketsNew YorkE: gareth.old@

cliffordchance.com

Paul LandlessCounsel, DerivativesSingaporeE: paul.landless@

cliffordchance.com

Francis EdwardsPartner, DerivativesHong KongE: francis.edwards@

cliffordchance.com

Habib MotaniPartner, FinanceLondonE: habib.motani@

cliffordchance.com

Lena NgCounsel, Funds and DerivativesSingaporeE: lena.ng@

cliffordchance.com

Laura Sheridan MoutonCounsel, FinanceSydneyE: laura.mouton@

cliffordchance.com

Matthew FaircloughPartner, Capital MarketsHong KongE: matthew.fairclough@

cliffordchance.com

Connie HengPartner, Capital MarketsHong KongE: connie.heng@

cliffordchance.com

Matthias FeldmannPartner, FundsHong KongE: matthias.feldmann@

cliffordchance.com

Huw JenkinsPartner, FinanceLondonE: huw.jenkins@

cliffordchance.com

Ying WhitePartner, FundsBeijingE: ying.white@

cliffordchance.com

Michael LishmanPartner, CorporatePerthE: michael.lishman@

cliffordchance.com

© Clifford Chance, July 2013

13New developments accelerate Renminbi internationalisationJuly 2013

Notes

14 New developments accelerate Renminbi internationalisationJuly 2013

© Clifford Chance, July 2013

Notes

© Clifford Chance, July 2013

Clifford Chance LLP is a limited liability partnership registered inEngland and Wales under number OC323571.

Clifford Chance LLP is a limited liability partnership registered in England & Wales under

number OC323571. Registered office: 10 Upper Bank Street, London, E14 5JJ. We use

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