Linklaters has brought Andrew Malcolm, Head of Capital markets - Asia, Partner, Hong Kong to Luxembourg to take part in the panel discussion on the Financial Reform in China at the Luxembourg Renminbi Forum on 3 June. He will focus on the China International Payment System (CIPS) and the internationalisation of the renminbi - both viewed as ‘potential game-changers'.
1. Launch of the China International Payments System (CIPS).
First announced in 2012, the latest news - in March 2015 - indicated that the system could be rolled out before the end of the year.
Details are still scant, but the expectation is that CIPS will be:
- operated by People's Bank of China (PBOC)
- open to direct participation of international banks
- linked to the domestic China National Advanced Payment System (CNAPS) bank settlement system
- will adopt some form of internationally compatible messaging system. CIPS will likely a Real Time Gross Settlement (RTGS) system, operating for up to 20-hours a day to cover all major time zones.
"CIPS should establish the settlement of offshore renminbi as safe and routine, putting it alongside such familiar systems as TARGET for the euro and Fedwire or CHIPS for the US dollar. It will in time replace the current use of offshore settlement banks - Hong Kong is still the major offshore settlement centre, but there are now some 14 designated offshore renminbi settlement banks across the world".
CIPS will enable settlement of the offshore currency in "central bank money" rather than as currently in "commercial bank money" and will link settlement directly to applicable PRC laws and regulations where the current system introduces the legal and political risk of one or more offshore jurisdictions. The link with CNAPS will provide a continuing and elegant mechanism for the policing of capital controls - for so long as capital controls continue to apply.
2. The realisation of a "convertible" renminbi.
In other words "the relaxation of capital controls so that the renminbi will no longer be thought of as "tightly controlled", and the distinction between the offshore and the domestic currency will be much reduced".
"Much is being made of China's desire to see the renminbi included later this year in the IMF's Special Drawing Rights (SDR) Basket. Inclusion requires the renminbi to be a "freely usable" currency, a concept which is closely related to that of free or full convertibility".
"Although the renminbi is usually still referred to as "tightly controlled", it is already much more convertible than is generally realised". The renminbi has been fully convertible for current account transactions (essentially foreign trade) for many years. Since at least 2010 it has also been freely convertible for all transactions in the offshore market.
"Controls have remained on cross-border flows on the capital account. Here, the People's Republic of China (PRC) authorities have proceeded more cautiously in a step-by-step approach using pilot schemes, qualifying investors, lock-ups and quotas to move forward." In April this year, the Governor of PBOC drew attention to the fact that of 40 items in the IMF's definition of a country's capital account, only five remained non-convertible in the PRC: all the others already permitted some degree of convertibility.
Unusually, PBOC has given a clear roadmap for future development in this area. The PRC is in the final stages of implementing the "managed convertibility" of its currency. This is a thought-through departure from the accepted notion of the "free convertibility" of most Western currencies (including the US dollar, the euro and the pound sterling). This might be convertibility with Chinese characteristics, but it incorporates a number of ideas which the IMF itself articulated in a review of capital controls in the wake of the Asian financial crisis of the late 1990s.
Further relaxation of capital account items is continuing on an almost weekly basis. It is in this way that the renminbi will be accepted as freely usable. Its cross-border capital account convertibility will be "managed" by, for example, the macroprudential management of external debt and the management of short-term speculative capital flows - a specific aim at "hot money" inflows and possible capital flight.
Taking these two developments together," there is the potential to transform the place of the renminbi in the world financial system by greatly increasing both its ease of use and settlement and the uses to which it can be put."
Perhaps the most important point however for banks and businesses is that these developments are imminent.
