China needs to accelerate the expansion of offshore clearing centers

Earlier this month in Hong Kong, I attended a gathering of finance professionals from across the world.

The event was a few days after the news that a Chinese bank had been appointed the clearing bank for yuan transactions in Seoul, making South Korea another offshore yuan center in Asia.

Naturally, the news formed a topic of discussion for us, and I was very curious to gauge the popularity of the currency.

Amongst all of us, banker Andy from Hong Kong was the largest yuan holder, after myself.

He was actually the biggest fan and user of yuan, as I was excluded on the basis that it was my "home currency".

Andy said about a third of his cash and short-term bank savings were in yuan, with the rest in Hong Kong or US dollars.

"I like renminbi because I need to use it as I spend several months a year on the mainland," he said. "And holding yuan means I can always enjoy high interest and exchange gains."

Amy, a financial controller from Singapore, said she had about a tenth of her short-term capital in yuan. "In Singapore, you don't have many opportunities to use it as an individual buyer, but institutional investors and trading companies often trade in renminbi. It is convenient to sell the yuan at a good rate to them via banks, but not so good recently because it is depreciating. I'm reducing my yuan holding."

The currency, however, had failed to lure accountant Margaret from Sydney. She even had no idea what the notes look like.

"The currency is not popular in my city," she said. "I don't know where to get it, exchange it or spend it. It's just not a thing in my life."

The differences among the three people offered me some valuable pointers regarding the yuan's globalization.

First, its popularity among the group was actually in line with the maturity of offshore renminbi centers.

Hong Kong is the largest and earliest center, followed by Singapore. Therefore, people in these two cities are more familiar with the currency.

In offshore centers, depositing, exchanging and using yuan is convenient, so people tend to hold yuan. In contrast, Sydney hasn't had a yuan clearing bank, so local lenders are reluctant to offer yuan services, despite the currency-swap and direct-trading deals between China and Australia. This results in few people there having an interest in yuan.

In this sense, China needs to accelerate the expansion of offshore yuan centers. A yuan clearing bank should be considered in countries and regions with strong trading ties with the country. Sydney and Dubai could be the next targets.

Second, as Andy and Amy both pointed out, their interest in the yuan partly comes from the currency's interest rate benefits.

Although offshore yuan holdings do not enjoy high interest rates, onshore yuan assets do. The interest difference between the two goes to as much as 3 percent. That means overseas holders gain by moving capital in and out of the Chinese mainland.

In addition, although the yuan has reversed its appreciation in the past few months, the expectation is still high that the currency will stay strong to provide exchange gains for overseas yuan holders.

Just as Amy did, overseas holders may reduce their yuan holding if the currency's value falls and interest differences narrow.

This sends a note of caution: The yuan should not always depend on its value to attract overseas users, it must have some other selling points.

The Hong Kong banker Andy's experience may offer some clues as to what those might be.

He has a third of his savings in yuan because he often needs to use it. He consumes on the mainland and at times invests in mainland companies, all in yuan.

For him, its value and the interest rates being offered may drop, but he still tends to hold a big portion in yuan. As he put it jokingly: "Yuan has hijacked my business and my life."

Andy's experience shows that the yuan can build its popularity on not only value but also its role as a medium of consumption, trade and investment.

Simply put, the yuan must become a daily-use global currency like the US dollar.

To achieve that goal will take time, but the authorities must act now as there is still so much to be done in this regard.

For example, capital account controls must be loosened to give foreigners more power to invest their yuan portfolios in China.

Financial markets should also be opened up to allow individual overseas yuan holders to invest in China's equity markets.

More Chinese companies, especially private enterprises, should be encouraged and given the freedom to invest overseas, using yuan.

And by doing so, overseas yuan holders can find more opportunities to spend their yuan right on their own doorstep.

The author is a Shanghai-based financial analyst. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 07/25/2014 page11)