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European offshore centres have key impact on renminbi’s global liquidity

Market participants in Asia and Europe see the development of offshore centres in Europe as having a key impact on the global liquidity of China’s trading currency, the renminbi (RMB), according to a study by Aite Group.

The report – Internationalising the Renminbi: Weaving a Web for the Next World Currency – which was commissioned by Clearstream, is based on interviews with market participants in Asia and Europe.

More than half of interview respondents contacted during Aite Group’s research believe that Europe will play a key role in the currency’s internationalisation process, though some raised questions around its long-term future once onshore markets have been liberalised.
Sixty one percent of respondents believe a developed European infrastructure is key to the success of the RMB.

“Many of those we have spoken to believe Europe as a whole will eventually cooperate to foster offshore liquidity in RMB, while only the minority now predicts Europe will fail to garner enough liquidity,” says Virginie O’Shea, senior analyst in Institutional Securities & Investments at Aite Group. “It will be a long road ahead, however, and there are still questions about whether full convertibility of the currency is a prerequisite for further significant progress to be made.”

The internationalisation of the RMB is seen as a three-step process in which the currency is first used as a global trade and payments currency, then as a global investment currency and finally as a global reserve currency.

As a trade currency, the RMB has come on by leaps and bounds in recent years and is now the second most used currency for trade finance in the world. The percentage of total global trade value settled in RMB rose from 1.9 per cent in January 2012 to 8.7 per cent in October 2013, an increase influenced by the Chinese government’s mid-2012 decision to further open the market to allow importers and exporters to settle trade transactions in RMB.

Operational issues remain the biggest barrier to the use of RMB in trade finance and payments. In particular, a lack of clearing broker readiness for operating in RMB (32 per cent) and translation issues (32 per cent) are cited as the main challenges, according to survey respondents.

Marc Robert-Nicoud, executive board member of Clearstream in charge of corporate strategy, says: “Aite Group’s research provides a unique insight into financial markets’ growing interest in the Chinese currency. The findings reflect the potential for RMB growth while helpfully identifying key barriers to the further development of the offshore RMB, which financial market infrastructures can help address.”

A main success factor for the international development of the RMB market will be the establishment of an efficient and recognised infrastructure to optimise liquidity. It is therefore crucial to facilitate the issuance, settlement and custody of RMB-denominated bonds in the European market, as well as to further develop RMB-denominated products and collateral management services, thereby offering market players the opportunity to optimise their access to what is still a limited volume of offshore RMB.

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