Special Guest Post : The A-Z of the offshore deliverable Renminbi

This is really history in making – internationalising a currency before it is fully convertible. This is what China has been doing for the past 5 years since it allowed a Chinese bank to issue a CNY bond in Hong Kong that is


deliverable in CNY. Since then, the market has grown multi-fold and practically, every product type is out there now from FX spot, forwards, cross currencies, options and soon, futures.

Last Friday, 31 August, Taiwan announced that it has signed a CNY swap line with China. This will be the first “live” CNY swap line outside of China. It’s the #17th line that the PBOC has offered to foreign central banks. Although all the lines are said to be used for faciliating the use of CNY for trade settlement between the recipient countries and China, the foreign central banks so far do not actually use the lines for this purpose. Instead, the banks in these countries must still go through Hong Kong to settle any CNY trades for their customers with counterparts in China. The reason is that there is currently only one clearing line outside of China – that operated by Bank of China (Hong Kong) Limited. A swap line from the PBOC is not a clearing line. The swap line needs to be “pulled” by the central bank to exchange its own currency for CNY. The conditions to do so are not clearly spelt out. The first such line was given to Korea soon after Lehman. The intention then was to provide Korea with liquidity – but it would be in the form of CNY liquidity, not USD liquidity so that during times of USD global liquidity squeeze, China is telling Korea they can still settle their bilateral trade using CNY, and forget about the USD.

It is interesting that Taiwan said they would get a clearing line back to back to this swap agreement at the central bank level. It might be that the designated clearing bank will be tapping on the Central Bank of China (Taiwan)’s swap line to help settle Taiwanese corporates and institutions’ business with China. Or it might be that the clearing bank will get its own quota to do its business, separate from the quota that the CBC will get from the People’s Bank of China.

Taiwan’s case shows that although China has made deliverable a huge pool of CNY outside of China, it still cannot enter Taiwan as Taiwan itself has capital controls. Hence, the only way to resolve this is to offer a line straight into Taiwan. This is how far China would go to engage strategic partners to use the CNY.

Japan will be next. Australia will be another.

In July, Singapore also announced that it would be getting a clearing line. Unlike Taiwan, Singapore is an open financial centre. Hence, Singapore’s clearing line can be readily shared with third parties i.e. Singapore banks can help Malaysian corporates clear their CNY trade with China, or for that matter, clear it for any other counterparty outside of China who accepts CNY from the Malaysian corporates. Taiwanese banks cannot do so because they are behind capital controls.

Taiwan’s central bank said after getting the CNY clearing line, the domestic interbank market will start quoting USD/CNY deliverable in Taiwan. So it will start a different FX market for CNY but only for Taiwan’s own market players. Hence, the exchange rate might not be the exact same one as that quoted in Hong Kong, now called CNH. Governor Perng therefore proposed a CNT as the new deliverable CNY.

Very quickly people have therefore come up with the whole A-Z of deliverable CNY – CNA(ustralia), CNI(ndia), CNJ(apan)… CNS(ingapore)… and so on.

This is becoming very interesting. Would this make the Renminbi strong? To some extent, yes, it helps. Think of this as a franchise business. Is McDonalds successful because its burgers are great or its marketing strategy is great? Or both? Will more of China’s trade partners accepting CNY make it strong? Yes, of course but not all the way. At the end of the day, it is demand and supply. If the outside world demands, China supplies instantly, the price of CNY stays in equilibrium. It will only become expensive when the PBOC plays it slowly… goading the market along but administrating the dosage carefully while keeping up the interest, that the CNY will keep getting stronger.

How much has the price of a Big Mac gone up over the last 10 years, 20 years… think about it.