Chapter 3. Factor Conditions and Global Linkages at Play in Singapore’s
3.4 The Renminbi factor
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especially as the Brunei Dollar follows the MAS policies and is interchangeable with the Singapore Dollar (Autoriti Monetari Brunei Darussalam, 2011). To kick-start the rise of the nascent Islamic finance sector the MAS has enforced tax breaks favoring this specific sector in 2008 (Monetary Authority of Singapore, 2013f).
3.4 The Renminbi factor
The RMB (Renminbi) internationalization is financial market’s latest trend alongside Islamic finance. The country that will be able to build up an offshore RMB center will be propelled to become an international finance place, and profits would flow.
3.4.1 The internationalization of the RMB: historical development
China has become the world’s second largest economic power, but its currency is just at the beginning of its internationalization process. Until recently the Chinese government did not allow the convertibility of its currency, and most of China’s cross border trade was conducted in USD.
However, since 2008 Chinese regulators have expressed their willingness to internationalize the RMB. The world’s first international payments made in RMB were allowed in 2009 in Hong Kong, and it became a de facto RMB offshore center (HSBC, 2013, p. 3).
Those recent moves give the appearance of an internationalization of the RMB. A point is rarely mentioned though, a difference is made between the offshore Renminbi (CNH) and the onshore Renminbi (CNY). The CNY remains under tight control of the Chinese regulators, while the CNH benefits from looser regulations (Badkar, 2013). This situation while unsustainable on the long term has so far been set as a middle ground solution, as China is not yet ready to let its currency be traded freely.
While non-residents can open RMB denominated accounts in China, it requires a lot of paperwork. Hence Hong Kong is preferred by MNCs, as opening procedures for RMB accounts are simpler and international RMB transactions less regulated than on the Mainland.
In mid 2010 trade between foreign countries and twenty out of the thirty Chinese provinces (Beijing, Tianjin, Inner Mongolia, Liaoning, Shanghai, Jiangsu,
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Zhejiang, Fujian, Shandong, Hubei, Guangdong, Guangxi, Hainan, Chongqing, Sichuan, Yunnan, Jilin, Heilongjiang, Tibet, and Xinjiang) was allowed to be conducted in RMB, thanks to the “RMB Trade Settlement”. Since August 2012 this agreement has been extended to all Chinese provinces. Yet, the Chinese central bank keeps a tight grip on international RMB flows (Bank of China, n.d.).
In 2013 the RMB represented around 8% of all China’s international trade.
This shows that foreign companies have been fast to seize this opportunity as transactions are now faster and transaction costs are lower. What’s more, this allows MNCs to more easily repatriate their funds to their home country. Although on an international level, the RMB still only represents 0.76% of total global transactions (Euromoney, 2013).
The Chinese government aims as well to make the RMB a reserve currency31, with for instance the signing of an agreement between China’s and Austria’s central banks in 2011, that has allowed the European country to hold the RMB in its foreign reserve. This agreement was the first signed by China and a non-Asian country (Xinhua, 2011).
The Chinese government has strategically used Hong Kong as its platform to internationalize the RMB, Hong Kong had deposits worth 944.9 billion RMB in May 2014.
This clearly means that other places that wish to position themselves as RMB offshore centers are fighting for the second place and not the first one. Furthermore, RMB deposits are still mainly based in China with around 100 trillion RMB, versus a bit more than 1 trillion overseas (Euromoney, 2013), thus Hong Kong holds the vast majority of it (Hong Kong Monetary Authority, 2014).
All in all, a few main problems remain to be solved before the RMB can become a truly international currency:
The gap between CNY and CNH.
The overall low demand abroad in RMB denominated investment vehicles.
The fact that the RMB is still not allowed to float freely against major currencies, such as the USD, and the Euro.
31 A reserve currency is a currency that is massively held by central banks around the world in their FX reserves, and that is widely used to conduct international transactions. The advantages of having once currency as a reserve currency are various, lower transaction costs and cheaper imports are the main benefits, as currency exchange is no longer needed.
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3.4.2 Where does Singapore stand in the race to become a major RMB offshore center?
In 2013 Singapore started RMB clearing operations32 through the Industrial and Commercial Bank of China (Singapore Branch) (中國工商銀行) that works as a clearinghouse. This was the third agreement of this kind in the world, after Hong Kong and Taiwan. MOUs were also signed with China Beijing International Mining Exchange and the China Financial Futures Exchange to build and list financial vehicles linked to commodities on the SGX. The SGX seizing this opportunity also started to handle RMB denominated bonds in May 2013 (Singapore Exchange, 2013, p. 16).
The same year the MAS and the People's Bank of China signed a bilateral currency swap agreement. Thus helping firms in need of RMB financing options, as they will no longer have to first exchange their SGD in USD, then from USD to RMB, eventually lowering transaction costs (Monetary Authority of Singapore, 2013a, p. 16).
The main proposition for Singapore to differentiate itself from Hong Kong or even Taiwan, is to market itself as the settlement area for RMB transactions, and RMB denominated investment opportunities in the ASEAN region.
Nearly 4,000 Chinese companies operate in Singapore, mostly using the city-state as their operation center for the ASEAN region (DBS Group Research, 2013, p.
19). Therefore, they will probably be the real instigators for Singapore to gain momentum as an offshore RMB center. In March 2014 it was announced that the city-state RMB deposits amounted to 200 billion, with a 70% increase on a year-to-year basis (Xinhua, 2014).
32 “Clearing operations” refers to the process needed after sellers and buyers have agreed on a trading deal. It is necessary to centralize buyers’ and sellers’ orders; it allows the intermediation of transactions, and seals monetary transactions. Clearinghouses work as third parties that process and handle monitoring, compliance to tax regulations, etc.
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3.4.3 As China develops its internal financial market, is it too late for Singapore to enter the competition?
Singapore, Taiwan and London are currently competing to be the runner behind Hong Kong. Taiwan could be number two, as it is economically, geographically and culturally closer to China than Singapore or London.
Though London seems to be an aggressive competitor, unless the Chinese government favors the UK, Taiwan could easily seize the 2nd rank as Taiwan can tap into its large number of businessmen, estimated at 700,000, working in China who have saved large amounts of RMB, and are eager to repatriate them to their homeland (Lin, 2007, p. 99).
Besides the recent promotion of Qianhai in China as an outsourcing center for Hong Kong financial processing and accounting activities, there seems to be a trend for China to promote its own country as a RMB center (DBS Group Research, 2013, p. 19). This trend culminated in 2014 with the creation of the Shanghai Free Trade Zone that allows RMB Borrowing and exchange services, as well as cross-border settlements (Xinhua, 2014).
These developments show that Singapore may well have to compete behind Hong Kong and Taiwan. Furthermore, there is little doubt that London will put all its energy in seizing as much as it can of the profitable RMB offshore market.