As central banks abandon the flagging euro, one of four major global reserve currencies along with the U.S. dollar, the British pound and the Japanese yen, the Chinese renminbi has emerged as a contender for reserve status. In turn, custodians are promoting themselves as reliable service providers for renminbi-hungry investors.
This year the International Monetary Fund will decide if the redback will become the fifth currency in its Special Drawing Rights basket. China, the world’s biggest holder of foreign exchange reserves, is pushing to join that club. Reserve status would slash its dependence on the U.S. dollar, reduce forex costs for international trade, lower borrowing costs in offshore renminbi bond markets and help the country move toward full currency convertibility. In January the renminbi became the No. 5 global payment currency, according to SWIFT, an interbank messaging system provider based in La Hulpe, Belgium. The currency’s use looks set to grow as Beijing seeks to loosen capital controls and deepen its financial markets.
China began internationalizing the renminbi in 2009, when the financial crisis sparked demand for more choice of reserves beyond the dominant U.S. dollar, says Shiming Tan, Hong Kong–based global head of renminbi products and capital markets at Citibank.
Since then the country has introduced renminbi trade settlement and developed renminbi-denominated dim sum bonds, issued in Hong Kong. The renminbi qualified foreign institutional investor (RQFII) program lets offshore fund managers buy securities in mainland China via Hong Kong, France, Germany, South Korea and the U.K. Thanks to last November’s launch of the Shanghai–Hong Kong Stock Connect scheme, foreign investors can now hold individual Shanghai-listed A shares directly for the first time. But before they can do anything, they need a service provider with access to the Chinese market.
There’s been a notable uptick in such business for banks, particularly those with sizable distribution platforms. The few custodians that operate in China suck up the cash. For example, HSBC Holdings’ share of the RQFII and older qualified foreign institutional investor (QFII) programs stood at 33 percent and 41 percent, respectively, in February.
London-based HSBC, whose $6.61 trillion in assets under custody as of June 2014 make it the No. 6 global custodian, has renminbi trade capabilities in more than 50 markets. It was the first international bank to conduct renminbi transactions on six continents and led the first offshore renminbi-denominated bond and initial public offering, notes Martin Maciak, head of renminbi for banking and capital financing in the Americas. In 2011, Bank of New York Mellon Corp. became one of the first banks to receive renminbi license approval. BNP Paribas, Citi, Standard Chartered and four other firms got the nod as primary liquidity providers for the offshore renminbi market in Hong Kong last November.
Custodian banks, which charge clients for safekeeping of securities, and trade settlement and reporting services, are expanding their support of global investors’ investment and cash activities for the onshore and offshore renminbi markets, says Cindy Chen, Hong Kong country head of securities services at No. 4–ranked Citi, which had $15.4 trillion under custody as of June 2014. They help investors and central banks to access both markets and provide liquidity for new renminbi products like Stock Connect A shares, RQFII exchange-traded funds and offshore RMB money market funds.
Many custodians are developing infrastructure to support end-to-end servicing for such products. For example, HSBC has a web portal that connects RQFII ETF participants and processes trades to mainland China. The firm also created a Custody Plus platform that allows clients to settle Stock Connect trades the same day. Beyond these efforts, custodians with a Chinese presence must stay on top of regulatory and market changes to properly manage transactions for clients. Foreign investors seeking to enter Asian markets have always relied on custodian banks, Chen explains. When China opened its capital markets through QFII in 2002, the first thing institutions needed was a custodian to help them apply for the quota and follow its rules, she says. The same is true for RQFII today. In the case of Stock Connect, the local custodian plays an important role in helping global investors access the new program, comply with relevant regulations and operate in a T+0, or same day trading, environment.
As for the redback, it’s becoming a fixture on global markets, but currency exchange controls persist. “There are still a lot of uncertainties in terms of how long it will take for the RMB to become a reserve currency,” Citi’s Tan says.