FT BeyondBrics: ICBC bond latest step on London’s road to RMB dominance

FT BeyondBrics, October 15 2013

Read this in the FT here

ICBC is to become the first mainland-headquartered bank to issue an offshore RMB bond in London, according to the British government. The launch, which should take place next month and which was announced on Twitter by Chancellor of the Exchequer George Osborne, is a further milestone in the development of the renminbi as an international currency, and demonstrates London’s growing role as the European time zone centre for RMB trading.

The dim sum bond market, which refers to issues in RMB outside the mainland, began and flourished in Hong Kong, which remains the home of the vast majority of offshore issuance in the Chinese currency. However, in April 2012, HSBC issued the first London-listed RMB-denominated bond, raising RMB2 billion, 60% of it placed into Europe. Several other London issues have followed, from issuers as diverse as Banco de Brazil and Australia’s ANZ.

ICBC will not actually be the first mainland entity to issue a dim sum bond in any form, as China Construction Bank raised RMB1 billion in this way in November 2012. However, CCB did so through its London subsidiary, so Osborne’s announcement would appear to suggest that ICBC will issue through its mainland parent, rather than through the ICBC (Asia) subsidiary through which it conducts most of its offshore issuance.

It is little surprise to see ICBC spearheading Chinese issuance in the UK, since it was also the first to issue an RMB-denominated certificate of deposit, in that instance through its London subsidiary. Elsewhere, ICBC was given the role to be the first mainland RMB clearing bank in Singapore, another centre outside Greater China that is expected to host a great deal of international RMB activity.

News of the ICBC deal comes on the back of a series of new measures granted to London for RMB trading, which is one of the principal reasons Osborne is in Beijing. [LINK TO FT STORY HERE] London-based investors will be given the right to buy up to RMB80 billion-worth of mainland stocks, bonds and money market instruments, formalising London’s role as the second major yuan trading centre after Hong Kong.

The pace of development of the RMB as an international currency has surprised many long-time China bankers, but there is a long way to go until full convertibility.

The first step of the process is often seen as January 2004, when retail depositors in Hong Kong were permitted to convert some of their savings into the Chinese currency. The dim sum bond market formally got underway in October 2009, with an offshore bond from China’s Ministry of Finance, and the following year an agreement between the People’s Bank of China and the Hong Kong Monetary Authority began to open up several other possibilities for banks and their clients in the two locations to invest in one another’s markets and currencies. Li Keqiang, then senior Vice Premier, visited Hong Kong in August 2011 and made a speech clearly laying out the path towards full renminbi globalisation, and with that endorsement in place, central banks have increasingly sought to invest in China’s currency and securities. As things stand, the current account is open, but the capital account, although liberalising, is still closed in comparison to any other major world currency.

Standard Chartered said in a report last week that by 2020, it expected 28% of China’s international trade to be denominated in RMB, accounting for US$3 trillion per year. It expects that by then, dollar, euros and RMB will dominate global FX and rates markets; that the capital account will be “open but with some Chinese characteristics”, with much bigger portfolio and direct investment flows in both directions than today; that the offshore RMB debt market will grow by 30% a year and reach RMB3 trillion by 2020; and that a cross-border RMB payment clearing system will be fully operational by 2015.

London has attempted to seize the opportunity to be the centre for all areas of RMB activity in Europe, from foreign exchange to deposits, bonds and trade settlement, and the ICBC deal will be seen in that context.