However, given that the domestic Renminbi is not a convertible currency, this has led to the rise of what is commonly known as ‘Offshore Renminbi’ (CNH). Interestingly, the value of the domestic Renminbi (CNY) can often differ from that of the CNH, which initially took on a higher value than its domestic counterpart (although the variance is gradually diminishing).
While some lending of the CNH has certainly occurred along with the roll out of CNH denominated wealth management products (primarily within regional markets such as Malaysia and Indonesia), the larger focus on the CNH has been as a settlement currency. Essentially, it is now possible for companies purchasing within, or selling to, China to pay entirely in Renminbi and, as a result, reduce transaction and FX costs for their purchases. By the same token, Chinese companies and tourists purchasing outside of the country also benefit from using Renminbi as a settlement currency.
Hurdles impact adoption
However, there are still a number of challenges holding back the wider adoption of the CNH. For one, many offshore holders of CNH have traditionally found it difficult to leverage their holdings into returns in any markets outside of China. This, however, is starting to change. China’s government has recently been experimenting with a number of pilot projects aimed at creating investment opportunities for the CNH. For example, an initiative known as RQFII provides a framework by which domestic fund managers can set up a presence in offshore markets in order to manage funds being invested into China. London has also been aggressively working to create CNH-denominated investment opportunities (though adoption has been rather slow).
International investors are also somewhat concerned that the new currency may be prone to volatility. In large part, this is because government ‘ownership’ of CNH is unclear and – without the implicit promises that stem from Central Bank backing – this has led investors to question how the currency would be stabilized in the event of significant market turbulence.
Other problems are rapidly being solved. For example, the lack of SWIFT codes for the CNH has, to date, made cross-border settlement rather difficult. While there are no plans to develop a SWIFT code for CNH, China's soon-to-be introduced National Advanced Payment System (CNAPS)II system will help to streamline cross-settlement processes around the Renminbi.
Converting CNH into opportunity
For foreign payments processors and banks, the rise of the Renminbi as a settlement currency creates a number of opportunities. For example, many multinational organizations based in Asia and trading in China will likely be keen to settle transactions in Renminbi which will provide a distinct competitive advantage to those banks that are able to offer this service. Others will be seeking to take advantage of offshore Renminbi treasury and wealth management services.
Banks also see increasing opportunities to put their CNH reserves to work within the China marketplace. For example, those interested in creating a JV with one of China’s third party payments license holders, may find value in funding their investment by using their CNH rather than US dollars. There are also increasing opportunities to channel offshore Renminbi into the Chinese market through the origination of loans.
However, the biggest opportunity most likely is for China’s domestic banks that are well placed to serve those global multinationals and regional trading partners with investment interests in China. As a result, the adoption of CNH has actually been a strong catalyst for domestic banks to explore opportunities to expand overseas in order to be closer to these potential customers and domestic enterprises expanding offshore.
A new global currency?
The wide-spread use of Renminbi as a settlement currency will also ultimately drive further growth in China’s transaction volumes. This will enhance the profitability of domestic payments processors and broaden the payments market outside of the domestic sphere.
Over the coming years, we expect to see many of the existing challenges facing the adoption of CNH start to be solved and anticipate that – while the currency will likely not usurp the US dollar as the global settlement currency any time soon – it may well become a strong alternative for those conducting business or settling transactions in Asia.
What to expect at Sibos
Those attending this year's Sibos conference in Japan will undoubtedly see a frenzy of activity related to the China market, with scores of new Chinese players busy building their networks and hunting for partnerships. Foreign players would be well advised to come to Sibos with a clear view of the value that they can bring to China and a strong mandate from their boards for exploring and establishing partnerships with local players.