Full yuan convertibility by 2020: head of ING Bank Shanghai

Piter De Jong, managing director and branch manager of ING Bank Shanghai. [Photo/chinadaily.com.cn]

When longtime Dutch banker Piter De Jong first arrived in Shanghai in 1998, industry players told him that the renminbi would be fully convertible within eight years?- eight being a highly auspicious number in Chinese culture. While yuan internationalization remains ongoing, it has accelerated considerably in the past three years, with the development of a dynamic offshore renminbi (CNH) bond market in Hong Kong and the Chinese currency increasingly used in cross-border trade settlement. De Jong, who heads the Shanghai operations of Dutch bank ING and doubles as the Shanghai chairman of the European Union Chamber of Commerce China (EUCCC) and national vice president of the EUCCC, maintains in 2012 that the Chinese capital account will be fully convertible eight years from now. This time around, his prediction happens to coincide with Shanghai’s goal of becoming an international financial center by 2020.

China Daily visited De Jong at his office in the Lujiazui financial district to discuss the internationalization of the renminbi and its effect on business in China and globally.

CD: To what degree is renminbi internationalization market-driven?

PDJ: It is the will of the market, but I believe the government also wants what is in the best interest of the economy. To make the yuan an internationally-traded reserve currency requires full convertibility. Sooner or later, the renminbi will have to be convertible because of China’s sheer size and the importance of its economy.

CD: Why have expectations for yuan appreciation fallen off sharply?

PDJ: The market no longer expects the renminbi to appreciate at 4 percent a year. In part, this is due to a change in investor thinking about the US dollar, which since the third quarter of 2011 has been quite strong. Investors have come to expect that when the US dollar is strong against major currencies, it is strong against Asian currencies. And indeed, the pace of renminbi appreciation slowed toward the end of last year and in four of seven months this year it has actually depreciated against the US dollar. For these reasons, since last September, the yuan has been priced to depreciate over a 1-year horizon in the markets where it trades, onshore and in the offshore non-deliverable (NDF) and deliverable (CNH) markets.

CD: How does greater two-way yuan risk affect the renminbi trade settlement scheme?

PDJ: Previously, exporters to China were happy to invoice in yuan because they could earn 4 percent a year on average from renminbi appreciation. This speculative demand explained the lopsidedness of payment flows under the renminbi trade settlement scheme. Greater two-way yuan risk means the renminbi cannot be internationalized through trade settlement. Payment flows will be balanced. Instead, internationalization will have to be driven by “real” as opposed to speculative demand. People outside China will want to hold yuan offshore – internationalize it – if they can do something interesting with the money, like invest onshore. Capital account opening will drive yuan internationalization to the next level.

CD: With the rise of the offshore yuan market in Hong Kong, companies involved in cross-border trade have sought to arbitrage the spread between the exchange rates on and offshore. If China accelerates interest rate liberalization, will that eliminate these arbitrage opportunities?

PDJ: Yes. Interest rates will be set onshore by supply and demand and expectations about exchange rate appreciation and depreciation. It will be possible to hedge interest rate and exchange rate risk in conventional ways. There will still be speculation. But risk-free arbitrage profit opportunities will be eliminated.

CD: Hong Kong is the first offshore yuan trading center. Which city will be next?

PDJ: London is well-positioned to be a renminbi hub in the European time zone. Singapore will compete to some degree with Hong Kong as an offshore yuan hub in Asia, but it will not threaten Hong Kong. As a part of China and the starting point for all renminbi pilot programs, Hong Kong cannot be replaced by Singapore or anywhere else. However, the pie is big. Currently, just 9 percent of China’s global trading is invoiced in renminbi. That figure is expected to rise to 30 percent by 2015. There is room for a number of offshore yuan trading centers across different time zones.

CD: How will multinationals in China benefit from full yuan convertibility?

PDJ: Financing themselves in China will be easier. If the yuan becomes convertible, then multinationals can simply borrow yuan at the headquarters level overseas and then do renminbi intercompany loans, rather than taking yuan loans from banks in China as they do now. It will be simpler and less costly.

On the trading side, companies will be able to better hedge their currency exposures. Right now, if a company sells something to China, they might sell it now but get paid six months later and they have a currency exposure, which they normally like to hedge.

It will also free up multinationals with regional headquarters in Shanghai to move their financing for the rest of Asia to the city. Cash management will be simplified. It will be possible for the first time to create a cash pool of different Asian currencies in a financial center on the Chinese mainland. Large international companies putting their regional treasury centers in Shanghai will greatly benefit the city’s bid become to a global financial center.

CD: What are the major risks to China in liberalizing the capital account?

PDJ: Full liberalization means money can flow freely in and out of the country. Currently, that flow is restricted, which gives China a good level of control over its economy. If the renminbi were to become convertible tomorrow, hot money might surge in or out, either of which could destabilize the financial system. The benefits of capital account opening – efficient pricing of financial capital – come with risks and it is natural that the authorities will take a deliberate approach, starting with small pilot programs that can be scaled up as experience shows them to be successful. Our eight-year forecast for full capital account convertibility is a reasonable timetable.

CD: Once it trades freely, will the renminbi become a regional Asian reserve currency, an international reserve currency or both?

PDJ: I believe in manifest currency destiny. In 2020, China will be close to overtaking the United States as the world’s largest economy. Its financial markets will be fully integrated into the global financial system as today its product markets are integrated. It will have a currency befitting its status, which will be one of the world’s reserve currencies.