Renminbi internationalisation: opportunities and challenges

The continuing internalisation of China’s currency, the renminbi (RMB), presents both opportunities and challenges for international financial services firms, according to a report by The Depository Trust & Clearing Corporation (DTCC).

The post-trade market infrastructure for the industry provided the research for the report, published by Celent, a part of the global management consultancy group Oliver Wyman.

It calls for coordinated efforts by industry participants to understand policy adjustments and market structure changes currently underway in the Asia region. This includes preparing for the long-term operational implications of China’s increasing integration with global markets.

Examples of this on-going integration include China’s moves to open its mainland stock markets and asset management industry to overseas investors through stock connect schemes and a mutual recognition of funds programmes with Hong Kong.

In addition, recent policy changes have encouraged foreign institutions to increase their activity in China’s interbank bond market. At the same time, the International Monetary Fund (IMF) last month added the RMB to its special drawing rights (SDR) basket and many market participants believe it is only a matter of time before global indices begin to include A Shares in recognition of China’s growing integration with the Asia-Pacific region and global markets.

Upside and downside

“For firms seeking greater investment exposure to the world’s second-largest economy and largest trading nation, progressive RMB internationalisation represents a significant opportunity to trade new products, generate returns in new markets and further diversify risk,” says Matthew Chan, head of product and strategy for DTCC’s transactions services business in Asia Pacific.

However, the report also highlights challenges arising from mismatches between local market practices in China and international standards. Investors looking to enter the China market currently need to prepare for:

  • Tax and regulatory differences between China and international markets.
  • Restrictions on short selling and day trading.
  • Operational differences such as China’s short and complex settlement cycle and delivery versus payment (DVP) practices.
  • The middle- and back-office complexities arising from the RMB’s various currency codes – CNH for onshore and CNY for offshore market.
  • The challenge of translating Chinese data feeds for processes that apply to know-your-customer (KYC) and anti-money-laundering (AML) compliance.

Chan is nonetheless optimistic that many of these challenges will be overcome. “Our discussions with market participants and infrastructure providers reveal a long-term ambition to make China’s integration with other financial markets as seamless as possible from an operational perspective. That being said, it will take some time.”

Neil Katkov, PhD, senior vice president, Asia, for Celent, agrees. “Our research highlights that RMB integration to global markets affects not just global foreign exchange markets, but also a growing line up of RMB-related financial products,” he notes.

“As a result, investors and financial firms eager to gain exposure to China’s capital markets need to plan thoroughly and carefully navigate the regulatory landscape and operational complexities. Service providers with the appropriate technology and expertise will be needed to help market participants navigate these challenges.”

Ad-hoc procedures a stop-gap

Since the November 2014 launch of the Shanghai-Hong Kong Stock Connect some market participants have employed ad-hoc procedures to meet challenges, bridging different standards and practices between the global and China markets.

“This may not be sufficient for the depth of inter-connectedness and volume of trade expected to result from these schemes in the longer term,” suggests Chan. “Working with strong service providers can help individual firms and the industry to tackle the complexities arising from China’s increasing integration with global markets in a timely, cost-effective and scalable manner.

“We believe that increasing trade automation and enabling real-time processing across middle- and back-office functions can play a key role in accomplishing this. We hope this research contributes to the on-going industry conversation as the profile of RMB and RMB-denominated securities continues to rise.”

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