The rise of the Chinese renminbi: an unmatched opportunity for Qatar?
China is opening up to the world and is promoting the wider global use of its currency, the renminbi (RMB). This could present opportunities for other countries, including Qatar, to benefit.
China is already the largest exporting nation and the liberalization of the exchange rate, interest rates and the capital account have begun. Restrictions on the exchange rate have gradually been eased. In March 2014, the trading band was widened for the third time since 2007, from 1 percent to 2 percent, increasing the amount the RMB is permitted to deviate from the level set daily by the Chinese central bank, the People’s Bank of China (PBC). The authorities have stated the objective to gradually move towards a fully floating exchange rate within 2-3 years as part of reforms to liberalize the capital account. Currently, restrictions on the capital account limit investment inflows to quotas on portfolio investment for permitted foreign institutional investors. Investment outflows are tightly controlled with the main exception that transfers between the Shanghai and Hong Kong stock markets have been permitted since April 2014.
As part of the gradual liberalization of the capital account and the exchange rate, it is official policy to promote the greater international use of the RMB for global trade finance, investment, foreign exchange transactions and payments. As a result the rise of the RMB onto the global stage is already well underway. Its share of global trade finance has risen swiftly from 2 percent in January 2012 to 8 percent currently, overtaking the Yen and the Euro to become the second most-widely used currency for trade finance after the US dollar (which accounts for 80 percent). Trade settlement denominated in RMB has grown by over seven times in two years, from around $100 billion in 2011 to over $700 billion in 2013. Average daily RMB trading turnover has risen from $34 billion in 2010 to $120 billion in 2013, making it the ninth most traded currency globally. In terms of total global payments, the value of RMB transactions have more than doubled over the last year. Furthermore, the internationalization of the RMB has provided the basis for deepening offshore RMB capital markets. Offshore bond issuance in RMB (Dim Sum Bonds) has risen rapidly. It started in 2007 and during 2013 issuance reached $54.2 billion. In the first quarter of 2014 alone issuance was over $30 billion. Almost all of the issuance is corporate.
The authorities are actively supporting the internationalization of the RMB. They have signed $400 billion of swap agreements with over 30 central banks. The largest agreements are with Hong Kong, Korea, the euro area, Singapore and the UK. The aim is to improve liquidity in offshore RMB funding markets, supporting trade finance and deepening capital markets denominated in the currency.
A number of cities are seeking to benefit from the internationalization of the RMB by establishing themselves as financial hubs for RMB transactions. There is a large opportunity for the financial sector to capture income, fees and commissions from growing offshore RMB-denominated business through financing trade, foreign exchange transactions, issuing debt, taking deposits and issuing loans.
The Chinese authorities have supported the establishment of offshore centers for RMB transactions. Five offshore jurisdictions now have a clearing bank with direct links to the PBC and onshore Chinese interbank markets: Hong Kong (since 2003), Macau (2004), Taiwan (2012), Singapore (2013), London (2014) and Frankfurt (2014). The PBC announced in June that it would also be designating clearing banks in Paris and Luxembourg. The clearing banks typically have responsibility for settling RMB transactions and acting as an intermediary between foreign banks and the PBC.
For Qatar, an agreement between the Qatar Central Bank (QCB) and PBC was renewed in April 2014, which permits the QCB access to onshore Chinese interbank markets to purchase bonds for Qatar’s foreign exchange reserves.
Qatar can benefit from the internationalization of the RMB by leveraging links that already exist with China. Qatar’s LNG exports to China rose by 35.5 percent in 2013 to 6.8 million tons, accounting for 8.7 percent of total Qatari LNG exports. China is in need of LNG to combat high pollution from the coal-intensive power sector. LNG exports to China are, therefore, likely to continue surging. China is also the largest source of imports into Qatar.
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