Although many foreign banks have jumped through the various regulator hoops here in China to be able to operate Chinese Yuan (or RMB) services legally and in nearly the same manner as their local counterparts, on a day-to-day basis, anecdotal insight is that they are still treated very differently in terms of access to liquidity – often coming 2nd in-line behind their domestic counterparts. This has largely limited their domestic expansion, which has been impressive, but still represents a miniscule part of the overall market.
Recently HSBC announced their expansion of the off-shore RMB business to Australia. This is in addition to the nearly $1T market in RMB that has taken shape in HK in the past year.....and is the real story with foreign banks in China – not what they’re doing on-shore in China, but what they’re trying to do off-shore.
In a previous commentary (http://goo.gl/Y8omj), we looked at the latest trends in the RMB. One of the interesting fact about the currency, is that full-convertibility isn’t really needed. Sure the Chinese government is still constrained by the same economic principles that all other economies are: you can’t control f/x rate, money supply, and money flow, but they are able to still expand the usage and viability of the RMB as a trade and indeed investment currency through the loosening off-shore regulations that we’re seeing in HK.
But is there too much? The problem with more trade being settled in RMB is that somewhere someone has to take some foreign currency in exchange. That somewhere is BJ where China is sitting on one of the largest reserves USD in the world. Many an economist both domestic and foreign has expressed concern with these growing reserves and the fact that over the long-term, they are unsustainable and something that China has to get a handle on. Already the Chinese government is the largest purchasers of US treasury bills, but yet has many times indicated that it might slow/stop the purchase of them. The disincentive of course is that if they stopped purchasing, the price will drop and the piles of US debt that China already has will devalue. The US, where now lawmakers now considering raising the overall debt ceiling, is also inextricably tied to China, the largest purchaser and essentially the underwriter of the US economy at the moment.
Compared to the rest of the de-regulation of the financial industry in China over the past few years, the opening up of the RMB trade has been relatively fast with RMB swap agreements being setup all over the region and more clearing centers for the currency. Inevitably though, it can’t continue. Either the Chinese government will slow the expansion or the Chinese economy will burst as a result so the good times for the foreign banks won’t last. We believe that in the next six months, we’ll see a slow-down or potentially even reversal of the RMB expansion as China tries to reign in the domestic economy and control its appetite for USD debt.
What this inevitably means for banks is that the RMB products and services they are now clamoring to offer in other off-shore markets might have a limited lifespan. We don’t anticipate the RMB being fully convertible anytime soon, so it’s unlikely that banks will in the near-term be able to freely offer these products and services for awhile; they also should plan for the possibility that the products that they can offer be potentially more limited in the future.
As with anything, there is too much of a good thing…