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Exponential growth follows its launch here just six months ago
By SIOW LI SEN
China’s offshore renminbi, or CNH, turned one last week and almost everyone seems to be piling into the currency.
Although Singapore banks only began selling CNH products six months ago, the reception here has been as enthusiastic, albeit on a smaller scale, as in Hong Kong.
From retail depositors to private bank customers, from small and medium-sized enterprises (SMEs) to the largest corporates, Singapore banks say the demand for CNH is gaining exponentially.
DBS Bank, for instance, has seen CNH deposits from its February launch jump to CNH 19 billion as of end-May versus CNH 13 billion in mid-April.
OCBC said that since its March launch, CNH deposits have been growing at an average 50 per cent month-on-month. HSBC too is seeing continued demand for the currency, particularly for RMB-denominated investment products.
On the corporate front, banks told BT that customers, including small and medium-sized enterprises have embraced CNH trade settlement in a big way.
Standard Chartered Bank said that in the first half of this year, it saw an increase in the number of RMB current accounts opened as well as export letter of credit with growth in excess of 200 per cent.
HSBC said one in five traders here expect to use RMB as a trade currency this year. OCBC’s RMB transaction volume in the first half of 2011, compared to the second half of 2010, has increased five times.
The same scene is playing in Hong Kong. It was only a year ago, on July 19, that banks in Hong Kong were allowed to freely transfer RMB. Since then, the CNH deposit base has ballooned more than six times in size - from a RMB90 billion inert pool of currency into a RMB549 billion deposit base supporting a liquid and actively traded currency and money market, said an HSBC report last week.
Cross-border RMB trade settlement has risen over six-fold with such trade now accounting for 7 per cent of total trade in the first quarter, from less than one per cent a year ago.
In Singapore, banks began selling CNH deposits and CNH-related products early this year for individuals, while businesses such as commodities traders have been quick to add the RMB as a settlement currency to reduce currency risk.
‘The RMB is increasingly becoming a core currency for corporations just like the dollar and euro,’ said Tom McCabe, DBS Bank’s group head of global transaction services.
He attributes this to the explosive growth of China’s intra-Asia trade flows position and ‘the RMB as a key currency for a chief financial officer to use to offset currency risk’.
Willie Tham, HSBC Singapore’s head of commercial banking said: ‘The potential for businesses in Singapore to capture the wealth flows out of China is significant with our researchers predicting US$2 trillion of emerging market trade to be settled in RMB by 2015.’
‘Last year, Singapore was among China’s top bilateral trade partners with a total trade volume of over US$57 billion, and China was Singapore’s second largest trading partner with total trade amounting to S$95.3 billion,’ he said.
Singapore’s growing love affair with CNH is not unexpected given China’s status as the world’s second largest economy and its push towards internationalising the currency. There is also the excitement that Singapore could soon become the second offshore RMB market.
But there are risks. As with investments in any asset, values can go up or down, and the continuous release of rules relating to trade settlement can be a challenge for businesses, bankers said.
‘Take a CNH-denominated bond, for instance. It is crucial to assess the credit worthiness of the issuing company and whether or not the yield adequately compensates for the risk,’ said Marc van de Walle, Bank of Singapore’s head of product management group.
‘Liquidity is another criteria to pay attention to. Today, there is greater demand than supply of good CNH investment options and we advise investors to be selective,’ he added.
HSBC Singapore’s Mr. Tham says traders can find the constant flow of new rules bewildering, and they need to improve their accounting systems when switching to RMB.
‘Companies may need to invest in their internal accounting and payment systems to add RMB currency codes,’ he said.
United Overseas Bank’s spokeswoman said: ‘Customers are generally concerned with the regulations governing the use of the RMB as well as the ability to hedge the foreign exchange risk.’
The Monetary Authority of Singapore (MAS) is of the view that China is approaching the development of the offshore RMB market in a controlled manner.
Singapore’s status as the second RMB financial centre after Hong Kong is still a work in progress, said MAS managing director Ravi Menon.
‘We are in fairly advanced stage of discussions with China on this, but it is still early days to comment on the size or prospects for an offshore RMB market here,’ he said last week during a briefing on the MAS annual report.
‘It is very early days, I know there is a lot of excitement about this and we are of course excited about it too, but it’s not as if it has taken off and is going to take off in a big way, and we’ve not actually inked the deal yet,’ he said.