Larger Quotas

At the end of 2012， the China Securities Regulatory Commission （CSRC） called in 20 fund management companies to discuss a revision of the pilot measures for renminbi qualified foreign institutional investors（RQFIIs）. Currently the revised measures are subject to approval by the related ministries and commissions and will soon be issued for implementation.

The revision focuses on two aspects. First， to enlarge the scope of institutions qualified for RQFIIs instead of only securities and fund management companies. Second， to relax the limit of investment proportions. According to present measures， only 20 percent of RQFII funds are permitted for investment in the mainland’s stock market， while the other 80 percent must be invested in the bond market. After the revision， such restrictions may be relaxed or eliminated.

Responding to demand from the Taiwan market， the CSRC approved the RQFII pilot program there， with a preliminary quota of 100 billion yuan （$15.92 billion）. With this amount， the RQFII quotas will total 370 billion yuan（$58.92 billion）， 18.5 times the figure in 2011 when the RQFII program was first launched.

“The CSRC’s expansion of RQFII in institutional scope， investment and total quotas not only allows more and more international investors to invest in China’s capital market in a convenient way， but also indicates an accelerated progress of renminbi internationalization，” said Wang Yong， an analyst with CITIC Securities Co. Ltd.

Faster pace

Hong Kong is the world’s premier offshore center for renminbi. To facilitate the back- flow of renminbi， the CSRC and the State Foreign Exchange Administration （SAFE） jointly launched the RQFII program at the end of 2011， with a starting quota of 20 billion yuan （$3.18 billion）. The program allows qualified fund management companies and securities companies to issue renminbi funds via their subsidiaries in Hong Kong and invest in the mainland’s capital market.

Currently， 24 institutions have obtained RQFII qualifications and 19 RQFII products have been issued. The investment has even extended to the Japanese market. On February 27， two RQFII products —CSOP FTSE China A50 ETF and ChinaAMC CSI 300 Index ETF—began trading at Tokyo Stock Exchange in the form of Japanese depositary receipts.

According to Wang， Hong Kong has the world’s biggest amount of renminbi deposits. The city has larger RQFII quotas， the investment restrictions on the mainland market are alleviated， and the RQFII pilot program can begin in Taiwan. All these indicate that the CSRC is complying with the progress of renminbi internationalization and efficiently advancing the RQFII program.

In the early days of RQFII program the CSRC only allowed securities companies and fund management companies from the mainland to apply for RQFII qualifications via their subsidiaries in Hong Kong， perhaps intending to facilitate development of mainland companies in the city. Wang says this measure makes RQFII a franchise.

However， such a monopoly-like franchise cannot last long. In an environment of welldeveloped market competition， this measure aroused discontent among other foreign-funded institutions in Hong Kong. The CSRC hence must expand the scope of RQFIIs.

According to Wang， the revision this time allows Hong Kong subsidiaries of insurance companies and banks to apply for RQFIIs， and in the future the CSRC may further extend the scope to all asset management companies， including foreign-funded ones in Hong Kong， and ultimately to all the asset management companies in the world. At that time， renminbi in any place of the world can flow back to the Chinese mainland， hence the currency becomes global.

Liu Linan， a senior analyst with Deutsche Bank Greater China， says expanding the RQFII scope and quota and starting RQFII business in Taiwan will significantly boost the use of renminbi in Southeast Asia.

The renminbi offshore business in Taiwan began on February 6. On the same day， renminbi deposits totaled 1.3 billion yuan （$207.01 million）. Currently， 46 banks have signed renminbi clearance agreements with Bank of China’s Taipei branch and opened settlement and clearance accounts.

Taiwan investors are strongly enthusiastic about the mainland’s capital market， and many Taiwan institutional investors have invested their renminbi floating assets in the offshore bond market in Hong Kong to purchase RQFII products. Taiwanese investors hope to have 100 billion yuan （$15.92 billion） of separate RQFII quota for Taiwan-funded financial institu- tions to carry out RQFII business. The mainland has actively replied to such a demand.

Besides the RQFII business in Taiwan， China’s central bank authorized the Industrial and Commercial Bank of China’s Singapore branch to act as clearance bank for renminbi business in Singapore， offering a new opportunity for Singaporean financial institutions to establish renminbi clearance banks in the country. RQFII business is likely to be launched soon in the city-state.

Dollar still dominates

Renminbi is playing a more and more significant role in the international market. It has been the major reference currency in East Asia. The currencies of seven out of 10 jurisdictions in East Asia， including South Korea， Indonesia， Taiwan， Malaysia， Singapore and Thailand， track renminbi more closely than the U.S. dollar. Some U.S. scholars and talking heads in the media are concerned that an accelerated internationalization of renminbi is threatening the U.S. dollar dominance in the international monetary system.

Li Yang， Vice President of the Chinese Academy of Social Sciences （CASS）， thinks the worry is unnecessary because renminbi is unlikely to replace the U.S. dollar as the world’s reserve currency in the near future.

According to Li， the international financial system needs multiple reserve currencies. However， convertibility restrictions hinder the progress for renminbi to become an international reserve currency， let alone to challenge the position of the U.S. dollar. At present， most renminbi trade settlement is for China’s imports. Since most foreign importers are not willing to pay in renminbi， the currency is seldom used in China’s exports. In 2012， foreign trade settled in renminbi accounted for less than 10 percent of the country’s total trade volume.

Wei Yanshen， a researcher with the Institute of Asia-Pacific Studies at the CASS， says during the accelerating process of renminbi internationalization， the cross-border trade settlement of renminbi has shown strong growth. However， authorities should be soberly aware of the problems and risks associated with renminbi’s internationalization： The yuan is still not well accepted by foreign traders. In trade payment， bond clearance and foreign currency reserves， renminbi still has a long way to go to be a global currency. Moreover， preventing risks in its internationalization and guaranteeing safe economic and financial operations are also important down the renminbi’s path to becoming a truly global currency.

Zhang Bin， a researcher at the Institute of World Economics and Politics at the CASS， thinks Hong Kong’s offshore renminbi market now faces many obstacles， such as the foreign exchange control and the interest rate system of the mainland. The exchange rate gap between the mainland and Hong Kong has become a main reason leading to the development of the offshore renminbi market. For these reasons， many problems remain before renminbi can become a global currency.