Domestic Bonds

China to increase cross-border investment, strengthen yuan


A staff member counts yuan notes at a bank in Linyi, east China’s Shandong Province. XINHUA PRESS AGENCY

China’s central bank is committed to expanding cross-border investment and financing channels to boost the opening of the country’s financial market, according to a recent key report.

The People’s Bank of China (PBoC), the central bank, will help foreign central banks, monetary authorities and reserve management departments to increase renminbi (RMB) denominated reserve holdings in their portfolios to strengthen the role of the government. Chinese yuan as a global reserve and investment currency, according to the PBoC 2021 RMB Internationalization Report, released on September 18.

At the end of June, RMB-denominated financial assets, including onshore stocks, bonds, loans and deposits, held by foreign entities rose to 10.2 trillion yuan ($ 1.6 trillion), an increase of 42.8% from the previous year, the central bank revealed in the report.

“With the vaccines available in 2021, although with varying rates and degrees of success, sovereign investors have focused on emerging markets in the Asia-Pacific region and China, in particular,” Terry said. Pan, CEO in China, Southeast Asia and Korea, Invesco.

The intentions of sovereign investors to increase allocations to China over the next 12 months are not surprising and have been a trend for the past four years. Sovereign investors expect to increase allocations to China both with new capital and by pulling out of North American and European allocations, which together make up the bulk of sovereign portfolios, Pan said.

“Although China faces various challenges, it remains a huge engine of overall global growth. “

Sovereign investors typically include global sovereign wealth funds and central banks.

In fact, the PBoC will continue to promote high-quality and two-way openness of the financial market, enriching the risk hedging tools and facilitating the allocation by foreign entities of RMB-denominated financial assets, said managers of the PBoC macroprudential management office. and its monetary policy department.

Innovative initiatives to promote cross-border RMB investments will focus on free trade zones, the Guangdong-Hong Kong-Macao Great Bay region and the Shanghai International Financial Center, officials said on condition of anonymity. .

Zhang Ming, deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences, said that providing more yuan-denominated financial products with greater liquidity for foreign investors could be an effective way of ” accelerate the process of internationalization of the RMB.

The government can launch more pilot programs in free zones to encourage innovative practices. In addition, encouraging domestic enterprises to invest directly in the Belt and Road Initiative regions can promote the use of RMB, said Zhang.

PBoC research indicated that in 2020, cross-border RMB receipts and payments accounted for 46.2% of total cross-border transactions, reaching a new high. In the first six months of this year, RMB cross-border receipts and payments totaled 17.5 trillion yuan, and the share increased to 48.2%.

Given the apparent strong performance of the Chinese currency, the offshore RMB bond market has apparently continued to recover this year, which sources say has also been driven by more stable interest rates in China compared to to other savings.

Strong demand for RMB-denominated assets and expected lower funding costs on an asset swap basis will also support the strong performance of the offshore bond market, according to Kelvin Lau, senior economist at Standard Chartered in Hong Kong.

PBoC officials also expected that cross-border use of RMB would be further boosted by international trade in goods and services. The signing of the Regional Comprehensive Economic Partnership (RCEP) will further promote trade development in the Asia-Pacific region and expand the use of RMB in trade and investment activities, they said.

RMB settlement in commodity trading is expected to remain a key driver of cross-border use of the yuan. Cross-border e-commerce will increase the scenarios for using RMB in foreign trade, the central bank added.

Lau said the central government had adopted a more accommodative policy, cutting banks’ reserve requirement ratio (RRR) by 50 basis points in July, which would make it easier to wait for further policy easing.

Lau predicted a further decline in the RRR of 50 basis points in the fourth quarter, with more proactive tax measures, which he said will be positive for China’s economic growth as well as domestic stock and bond markets.