Despite current market volatility, China’s outward trade and investment ambitions will be a defining commercial opportunity for ASEAN over the coming decades. The ability of Singaporean financial markets, institutional and retail investors and corporates to further embrace the Renminbi, in addition to a deepening of the local liquidity pool and the range of products available, will determine if this opportunity is grasped.
Singapore has been a global leader in adopting the necessary financial market infrastructure to enable cross-border flows of the Renminbi, and this proactiveness and foresight to position itself as a leading global Renminbi centre has delivered much widespread admiration.
A case in point is that Renminbi-denominated deposits in Singapore totalled 257 billion yuan at the end of March 2015, accounting for about 15% of deposits amongst Asian financial centres. In addition, Singapore is the top economy outside China and Hong Kong to be using the Renminbi for trade financing purposes. SWIFT data show that the Renminbi was one of the five most traded currencies in Singapore in 2014, compared to it being the ninth most traded currency globally.
Another example is China’s Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which offers one of the few channels available to international investors who want to participate in a significant way in China’s domestic capital markets. As of June 2015, Singapore has the highest RQFII quota utilisation rate in the region, outside of Hong Kong.
Clearly, Singapore means business in building financial links with China. But as China becomes an even greater power in international trade and investment, and its currency accordingly grows in stature, it is important that Singapore becomes both an enabler and a beneficiary of the Renminbi’s continued rise.
In 2015, the Chinese government has signaled that the pace of its economic and political reform will accelerate further.
The recent devaluation of the currency by the People's Bank of China is consistent with China's drive towards a more market-driven exchange rate mechanism. It is also clear that China is committed to making the Renminbi fully convertible sooner rather than later.
The “One Belt – One Road” plan, which aims to connect Asia, Africa and Europe through improved infrastructure, will help push China not just to the forefront but also to the centre of Asian trade and investment, and again the Renminbi will play an important role in this initiative.
The Asian Infrastructure Investment Bank (AIIB) was formed this year to help finance infrastructure projects which relate to the “One Belt – One Road” plan, but the scale of funding required will mean accessing capital markets, both in the Renminbi and other currencies.
Singapore is a signatory and fund contributor to the AIIB. Its strategic location, expertise in infrastructure project financing, and sophisticated capital markets make it ideally positioned to take the lead in Asia’s infrastructure development. Singapore has the opportunity to become a hub for raising and distributing all forms of capital to facilitate investment into the Southeast Asian countries, India and elsewhere in the Asia Pacific region in conjunction with “One Belt - One Road”.
The intended infrastructure investment into ASEAN will also act as a catalyst for a new wave of Chinese foreign direct investment into the region.
While a large part of this Chinese Foreign Direct Investment will remain infrastructure-focused, it will not be the only sector into which funds will be channeled. Indeed, we are beginning to see Chinese companies focus their outward investment towards sectors like manufacturing, real estate and technology, all of which play to Singapore’s strengths.
Singapore can further encourage local investment and increase Renminbi liquidity by supporting Renminbi bond issuance for corporates and, in the longer term, perhaps even facilitate fresh equity raisings denominated in the Renminbi to tap the vast appetite for investment products in China.
Renminbi-settled investment – both for Singapore companies investing in China and vice versa – can also provide benefits by way of creating a natural hedge for Renminbi-remitted trade. For example, a Singapore firm can raise capital in Renminbi to build a highway and can in turn use the Renminbi to purchase raw trade materials and other capital goods for the project direct from China.
Renminbi liquidity in Singapore should also be bolstered by the imminent launch of China’s Qualified Direct Pilot (QDII) scheme, which will allow Chinese individuals to directly invest in overseas financial assets. This could release a huge amount of capital (up to a theoretical US$6.61 trillion or RMB 41 trillion) into international asset classes over the next five years. Singapore’s strong cultural and people-to-people ties with China, along with its existing diversity of Renminbi products, makes it well-positioned to be an attractive destination for this potentially significant flow of capital.
Retail investment connectivity could also be strengthened through development of a Singapore-China Stock Connect capability – similar to the system recently introduced in Hong Kong and Shanghai and which would allow Singaporeans and Chinese to trade directly on each others’ equity markets.
But ensuring that Singapore is at the heart of these flows will require more than just waiting for Chinese infrastructure development and QDII2 to arrive. The nation’s continued position in the front ranks of the various Renminbi financial centres will depend on increased participation by both corporates and institutions in local Renminbi financial markets, continuing to deepen liquidity and support the growth of a broader range of products.
Collaboration between players in the financial industry, policymakers and regulators will therefore continue to be critical.
We have seen recently how banks in Singapore are now able to improve the flow of Renminbi liquidity locally by tapping China’s onshore Renminbi repo market. This, of course, assists in supporting the payment and cash management needs of Singaporean corporates and their regional treasury centres.
Another exciting development which is anticipated will be the launch of China’s International Payment System – expected towards the end of 2015. In preparation for this, Singapore needs to ensure that corporates here are sufficiently aware, educated and prepared, so that they will be able to take advantage from Day 1 after launch.
Liquidity attracts liquidity, and history has shown us at HSBC that new opportunities will naturally follow existing flows. Building a solid, broad-based Renminbi financial sector will thus require commitment and long term investment across the industry, but it will also enable Singapore to be positioned for growth as a financial centre for years to come. HSBC is already playing its part and looks forward to helping build a Renminbi financial sector for the future here in Singapore.