Another tiny step towards RMB internationalisation

Posted by Cardiff Garcia on Jun 27 17:20.

Here’s an item that slipped by us at the end of last week — but not past the worrisomely workaholic indefatigable Stacy Marie-Ishmael of FT Tilt, who spotted it while on vacation and forwarded it to us. (Thanks.)

From the emerging markets research group at BBVA:

A new policy rule of regulation on cross-border RMB FDI allows foreign enterprises remitting the offshore RMB back to Mainland China in form of FDI. Although still in pilot phase, the new rule will advance the development of the offshore RMB market and internationalization of RMB.

Yesterday People’s Bank of China (PBoC) publicized a new policy rule of regulation on cross-border RMB FDI. The new rule stipulates that, in principle, all the foreign enterprises are allowed to raise RMB fund in offshore RMB markets and repatriate them back tothe mainland as FDI. Previously, the foreign enterprises’ behaviors of remitting RMB back into Mainland are subjected to PBoC’s approval on a case-by-case basis.

For a bit of context, see our earlier posts on how China plans to internationalise the RMB and why it could lead to more offshore banking centres (at the moment it’s all Hong Kong).

BBVA reckon that the move makes a certain amount of sense given the astounding, exponential rise in offshore RMB since the start of last year.

This new regulation is still on a pilot basis, and the foreign enterprises have to go through a set of application procedures before remitting the RMB. Nevertheless, it is expected to be expanded in future just like the pilot program of cross-border RMB trade settlement (which was initially unveiled in June 2009 and largelyexpanded in June 2010). This new rule indeed finds new use for increasing offshore RMB deposit. By end-April, the RMB deposit in Hong Kong, the biggest offshore RMB center, amounted to RMB 511 trillion, around 8.5% of the total deposits in Hong Kong.

We anticipate that this new rule will further buoy the offshore RMB (“Dim Sum”) bond market and accelerate the pace of RMB internationalization. Hong Kong’s banking sector will become the main beneficiary of this new rule given Hong Kong’s leading position in developing the offshore RMB center.

This is another very hesitant step towards opening up China’s capital account, and a tiny one at that. It could be walked back very easily.

We also note that the overall internationalisation plan itself has quite a few sceptics. Included among those are Michael Pettis, who told us that, for example, the vast majority of recently approved cross-border trading has probably involved foreign sellers who are more interested in obtaining yuan for currency speculation than in meaningful trading activity.

Still, something worth watching.

Related links:
RMB rising – FT Alphaville
CNH centre: coming to a City near you? – FT Alphaville
Introducing Alphachat: the FT Alphaville podcast – FT Alphaville

This entry was posted by Cardiff Garcia on Monday, June 27th, 2011 at 17:20 and is filed under Capital markets. Tagged with , , , , .

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