by Christopher Balding
The NanfangToday, 11:34 AM
Last week I had the opportunity to speak at a conference on RMB Internationalization in Beijing at the invitation of The Asian Banker. Here are an assortment of my thoughts from both my speech and general take aways from my conversations.
First, I am quite glad I do not live in Beijing. Wonderful place to visit for a few days in a nice hotel, wouldn’t want to live there.
The general consensus seemed to be that the economy was slow but not collapsing. I did not specifically ask about whether it was 7 percent or probe about data quality so as to avoid projecting any of my own thinking on them. I would guess however that based upon my conversations the underlying economic conditions are slower than 7 percent but again not collapsing.
I did not talk to one Chinese banker or investor for whom the debt build up even registers. It was not even that they expected the government to bail them out but rather that it was not even something they thought about or considered. I not sure if this is due to potential lack of coverage in Chinese media, willful or strategic blindness, or just not taking the time to look at data. I did find it strange however that this issue in private conversations was simply nowhere to be found.
I heard talk, and it should be strongly noted that this is entirely unconfirmed though I have heard similar rumors elsewhere, that big banks are padding their NPL numbers by selling off bad loans. Nobody seemed to know who is buying them or on what cost basis, so it very well could just be rumors, but given the previous history of complicated swap and sales arrangements for NPL’s, this is not exactly a stretch.
Given the title of the conference of RMB Internationalization, the focus was on the impending announcement of the SDR decision by the IMF on including the RMB. Having lived in China for many years, one thing that strikes me is the frequent obsession with symbolism regardless of substance, though in all fairness this is true of many China watchers too. All the attention is on the decision of the SDR and very little on the substance of RMB internationalization.
Let me give you a few examples.
First, offshore RMB assets have actually been stagnating, and maybe even shrinking depending on the month, for about a year. Whether you look at RMB deposits outside of China, debt assets, or offerings outside of China, these have all been essentially flat for about a year. Whatever the IMF decides will have little to no impact on actual RMB internationalization. To provide some perspective, total offshore RMB assets are probably about $300-350 billion or a very small percentage of the really any single financial market whether counting equity, debt, or other asset types. If the RMB was not the Chinese currency, it would not warrant discussion as it would be so irrelevant to global finance.
Second, people have heralded the rise of the RMB by noting the increased use of the RMB in international trade transactions. However, this is a very biased estimate as it basically only accounts for trade where Chinese firms are on one side of the transaction. That’s fine to measure the impact of Chinese trade but it really has nothing to do with the internationalization of the RMB. There are virtually no trade payments transactions denominated in RMB where both partners are not Chinese. Despite a couple notable cases, there are very few cases where financial product offerings in RMB are independent of China. The RMB is rarely used as collateral for derivates trades, for instance. While there is significant potential should China actually liberalize the RMB, the story of RMB internationalization is significantly overstated in reality.
Third, inside China there is a persecution complex/conspiracy theory that the world (read: the United States and the Japanese) are trying to prevent the RMB from ascending to global prominence. The only problem with this narrative (read: mass hypnosis) is that it flies in the face of all factual evidence. Beijing has worked with other central banks to sign swap agreements but not let central banks obtain actual RMB. Central banks around the world would love to increase their RMB holdings but Beijing simply will not let them. Additionally, Beijing has been stepping up capital controls to prevent the RMB from leaving China and increasing offshore liquidity. This follows a policy of encouraging domestic firms to move offshore financing onshore which has the impact of draining offshore RMB from the fixed pool. I could explore this issue in much greater detail but it is self delusion to believe a US/Japan power play is the reason the RMB is not more prominent.
One of the most common issues you see in China relations with the rest of the world is similar to the Winston Churchill observation on the United States and United Kingdom: two great countries divided by a common language. Just because China and other countries use the same words, doesn’t mean they have the same conceptual understanding of the words. One word that I heard used a lot was “confidence”. But what was strikingly apparent is that Chinese and non-Chinese attached two very different meanings to the word.One word that I heard used a lot was “confidence”. But what was strikingly apparent is that Chinese and non-Chinese attached two very different meanings to the word. To the Chinese “confidence” means trust, faith, and belief in Beijing leadership and the economic power of China. Whenever you talk with Chinese actors they in this general area they talk about the rise of the Chinese economy and the importance of Beijing leadership. To most non-Chinese financial types, “confidence” means clear, transparent, predictable rules of the market that will allow them meet their objectives and fulfill their obligations. Investors that want to use RMB or access the Chinese financial markets want to know what the rules are, that they are applied consistently and fairly, regulators that don’t behave like drunk hummingbirds, and that they can access and move their money as they need. Interestingly, Chinese investors will offer up the same complaints, but will only say so in hushed tones after a few beers. They also stress this has nothing to do with their confidence in China or Beijing. The sooner Beijing can realize that investors have confidence in the quality of the market and not the omnipotent brilliance of Beijing, the better for RMB internationalization.
While the RMB joining the SDR basket will have enormous symbolic importance, in the short term it seems unlikely to have any practical importance. Central bank RMB holdings are almost exclusively held through swap agreements and not physical RMB, so it seems unlikely that joining the SDR will prompt Beijing to release a flood of RMB even on transaction specific agreements, like to other central banks. In other words, barring additional announcements, this would amount to little more than an accounting exercise rather than tangible changes. Especially given the bond and bank repatriation we see taking place right now in the market place that is shrinking offshore RMB liquidity, RMB internationalization is going to be nothing more than another nice cliche. SDR membership does not internationalize the RMB.
There is one simple reason for the RMB and SDR policy: Beijing knows very clearly that if they internationalize the RMB, they lose control of the price. Beijing is worried enough about the offshore RMB price in Hong Kong that they have intervened directly, buying up RMB to bring it back to parity and further reducing offshore RMB liquidity. It has also engaged in various derivatives futures pricing to set expectations. Beijing knows that if it allows enough physical RMB to leave China and be freely traded, it runs the very real risk of losing control and the RMB/$ peg will effectively break. This is also why they are more than happy to sign swap agreements where they continue to maintain effective pricing control, but refuse to allow physical RMB to leave or be traded. Again, this is not some international conspiracy but a conscious policy decision by Beijing to prevent RMB internationalization.
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