Renminbi on the rise
Non-Asian renminbi centres are becoming increasingly important. In 2013, RMB business in Luxembourg grew by 123%, exceeding growth rates of major Asian hubs like Hong Kong and Singapore. The Grand Duchy now ranks 2nd in the Eurozone in RMB payments and has Europe’s largest deposits and loan portfolio. According to Ricky Li, Economist at Bank of China Hong Kong, Luxembourg is moving forward to be a leading RMB centre in the world.
“The speed of liberalisation is expected to increase in the near future”, Ricky Li said during a conference in Luxembourg, organised by Bank of China Luxembourg Branch. “The value of cross-border RMB direct investment could surpass that of trade settlement by 2020”, he said. By that date, RMB derivative products will be ranked number seven amongst the major global currencies, due to more trading demand.
Li is sure that as long as the risk is under control, China will further open capital markets for foreign investment. Currently, foreign institutional investor’s share in China’s capital market is less than 2%, while in other emerging markets this figure accounts for 10 to 40%. “The RQFII (Renminbi Qualified Foreign Institutional Investor) is a tool for the Chinese government to test the impact of foreign capital”, Li said. The quota granted is currently 134.3bn and is expected to further increase.
The interbank bond market, still closed for offshore institutions, is also supposed to open up. Investing in Chinese RMB bonds will thus become an attractive option in the future.
The recently announced currency swap between the European Central Bank and the People’s Bank of China for 800 RMB bn will further underpin the importance of the RMB as a global reserve currency. China now has currency swaps with 22 countries and regions, providing an amount of 2,218 RMB billion. Several central banks, notably in the Asian region, have already borrowed RMB funds from the currency swaps.
Since 2010, also central banks invest in RMB-denominated assets, giving the renminbi reserve-like attributes already. This mainly happened in the Asian region, but also in Nigeria, where the local central bank plans to gradually increase its RMB holdings to 10%.
According to Li, the next focus of the Chinese government will lie on the liberalisation of capital accounts. Foreign institutional investors are expected to obtain more access to China’s capital market. “RMB is now in transition from a trading to an investment currency. The international reserve currency status will establish eventually”, Li said.
As one of the leading RMB centres in the Eurozone, Luxembourg is well positioned to expand its status quo. It is already the top location of choice when it comes to structuring Chinese investments. As the world’s second largest investment fund centre, conditions for Luxembourg are ideal to become the European centre of excellence for the setting up of RQFIIs.