A Continuing Divide
Multinationals were reluctant to hold RMB before the new rules took effect, and despite the creation of a more freely tradable offshore version, many firms may still hesitate. For one thing, RMB deposits earn a very low yield because there are a “huge” amount of deposits offshore (mainly in Hong Kong) and still few assets, Jaccard says. He puts the current tally at about 450 billion RMB in deposits and 65 billion RMB in assets. The bonds are mostly short-term and scarce, and share issuance “hasn’t been hugely successful yet,” he says.
Second, once RMB is offshore, a firm needs government approval to bring it back onshore for investment. “The regulator is fairly restrictive,” says Jaccard, “because its intent is to create an international currency, not to see the RMB coming back and fueling an economy that’s already on steroids.”
There are no published, explicit rules on how RMB can be brought back into mainland China, but “if you want to speculate in real estate, the likely response will be no,” says Jaccard. “If you want to build a factory in central Sichuan that will employ 10,000 workers, the answer is more likely to be yes.”
Jaccard expects RMB offshore deposits to grow rapidly, while assets will grow more slowly. Eventually, there could be more of an equilibrium if market sentiment shifts and there is no longer the expectation of RMB appreciation, creating less of an incentive to hold RMB and more of an incentive to borrow in RMB; or if China’s capital account opens entirely.
In the meantime, by letting RMB be used as an invoicing currency, China can combat large flows of U.S. dollars into mainland China. “The government is trying to tighten liquidity in the market to cope with inflation — that’s a key target this year,” says HSBC’s Sun.
Longer-term, the RMB could be fully convertible by 2015, say experts, but right now, Li says, the Chinese government is cautious. “China will definitely give up its strict RMB control policy — it has definitely made a decision in that direction,” he believes. Treasurers, stay tuned.
Vincent Ryan is senior editor for capital markets at CFO.