Skip to nav Skip to content

Special Seminar: Offshore Renminbi (CNH) Market London – February 16, 2012

CNH: A Long Journey for the EM Market?

Speakers at EMTA’s Seminar on the CNH Market expressed a range of opinions on the future prospects for offshore Chinese currency.  The event, held in London on February 16, 2012, drew a crowd of 185 market participants and was sponsored by Thomson Reuters.  Not all speakers were convinced the Chinese Renminbi would, inevitably, become fully convertible, yet all agreed the journey would be an interesting one.

Thomson Reuters’ Alan Wheatley led the discussion.  In his opening comments, Wheatley argued that Beijing had turned traditional sequencing for currency convertibility on its head.  “Usually countries loosen the FX rate, liberalize interest rates and develop domestic financial markets before allowing their currency to be used offshore, yet China is doing the reverse by first encouraging trade settlement in Yuan,” he ventured.  He opened the floor to comments on why the CNH was being promoted by China, and why it was finding an audience.

Steve Haydon (Bank of China), who voiced the panel’s most bullish long-term stance, argued that alternatives to the Dollar and the Euro were seen as necessary, while recognizing that volatility in 2011 served as a reminder that this was still a nascent market.  Haydon suggested that issues with movement of currency during the Arab Spring had led some to think about alternatives to the Dollar and Euro, whose movement could be “linked to Western politics.”  He added that it was not only Asian countries that were using the CNH as a reserve currency.

Speakers such as Standard Chartered’ s Thomas Harr viewed the CNH as being chiefly a means for firms doing business in China to mitigate currency risk.  Tim Condon of ING joined Harr in stressing that he remained unconvinced that becoming a fully convertible reserve currency was Beijing’s goal.  “I take the government at their word; their only goal is to mitigate FX risk for Chinese companies; I am not sure if there is a next step, or a larger goal,” Condon stated, with Harr echoing that China viewed CNH as a trade and investment currency, but not necessarily one to be used for Central Bank reserves.

Were Western importers starting to prepare invoices in CNH, Wheatley asked?  Condon asserted that any CNH-invoicing would accelerate if importers believed the currency would depreciate.  “Investors don’t hold CNH because they see it as a store of value,” he argued; “they hold for speculative value, which limits how much this experiment can be pushed.”

Aviva Investors’ Kieran Curtis also suggested there were limits to the external use of CNH, pondering how Renminbi could be used outside of China.  “For example, could one  use it on Bond Street?” he asked.  Haydon conceded that CNH had a long way to go before such acceptance might occur…although he cautioned attendees not to “underestimate the number of Yuan-denominated accounts already in London.”

The panel moved to a discussion of issuance forecasts for CNH-denominated debt in 2012.  Harr predicted $170-$180 billion in CNH paper in 2012, a slight decline from 2011.  Curtis specified that the majority of this was short-term debt, as investors shied away from greater duration risk.  He explained that CNH-bond issuers included the Chinese government, looking to develop the market (rather than raise funds); multinationals which intended to move funds into China and which wanted to match income with expenses; and Chinese corporations which sought to take advantage of the cheaper funding cost in Hong Kong, as opposed to the mainland.

Liquidity remained an issue in CNH bonds, Curtis acknowledged, and Haydon stressed that investors should recognize the “slow evolutionary process of this market….we are on a journey, and we don’t know how long the journey will take.”  Speakers did concur that the NDF market for the Yuan would decline as CNH liquidity increased.

Panelists discussed the rise of London as a CNH-trading center in the aftermath of Chancellor of the Exchequer George Osborne’s promotional trip to China.  Haydon believed that London could serve as a trading center for oil exporters and African countries with CNH interest.  Curtis further specified that London would serve as a second CNH trading center on the currency side and not on the bond side, at least until there was “too much Renminbi in the European market.”

Singapore’s future as a secondary CNH trading center seemed questionable; the panel’s two Singapore-based speakers agreed.  Harr pointed out that there was little need for two trading centers in the same time zone, with Condon concurring.

The fact that Chinese banks are opening London branches (e.g. ICBC, Agricultural Bank of China) served as evidence of London as a CNH center, but “we have to be realistic about the speed…financial markets people like us are not known for our patience,” noted Haydon.  Haydon also noted that liquidity would be built as London bankers get educated on the CNH market (“…and the turnout today shows there is interest), as well as the ability to process deliveries via market payment systems.

The event concluded with a cocktail reception.

Bank of China and Standard Chartered provided additional support for the program.

EMTA will hold a similar event in New York in 2012.