China's Trump Card by Yeung Raymond;

Author:Yeung, Raymond; [Yeung, Raymond]
Language: eng
Format: epub
Publisher: John Wiley & Sons, Incorporated
Published: 2020-09-28T00:00:00+00:00

Figure 4.11 Cross-border RMB payments with maninland China by economies, 2018

Source: PBOC

Figure 4.12 China's cross-border payment in RMB.

Source: PBOC

On the other hand, the net RMB inflows into China may actually be a positive sign of the yuan recycling process. In early years, China granted foreign countries a quota to invest their RMB funds via the RMB Qualified Foreign Institutional Investor (RQFII) scheme. In the past few years, the authorities opened up other channels including Bond Connect, Stock Connect, and direct access to China Interbank Bond Market (CIBM) by qualified financial institutions. These schemes have received great interest from financial investors. Particularly, Bond Connect has been an important channel for foreign financial institutions to invest in China's sovereign bonds and policy financial bonds. It is an important element to close the loop of the yuan recycling.

In fact, China's bond market is large enough to assist the yuan recycling. In 2018, the market size reached USD 12.9 trillion, larger than Japan (USD 12.5 trillion). China is now the second-largest bond market by market value in the world (Figure 4.13). China Government Bonds (CGB) and Policy Financial Bonds (PFB) issued by policy banks are heavily traded in the market and comprised 17.4% and 16.8% of outstanding bonds, respectively. Expressed as a ratio to GDP, however, China's bond market is considered to be less developed.

China has been very proactive in attracting foreign bond investors in the past few years. Since 2015, foreign central banks and sovereign funds have been allowed to trade all rate products (cash bonds, repos, bond lending/borrowing, bond forwards, IRS and forward interest rate agreements) in the interbank market (Figure 4.14). Foreign public-sector investors are also allowed to trade FX derivatives in the onshore market. China also has a large corporate bond market (credit). However, the lack of good credit rating scheme in the onshore market has limited the investment appetite of global investors who are used to considering the ratings by following Standard & Poor's, Moody's and Fitch.

To enhance the attractiveness of CNY-denominated assets, China actively seeks for an inclusion in major financial market benchmarks. On June 1, 2018, the Chinese A-share was formally included in MSCI Emerging Markets Index and Global Standard Index, which was conducive to attracting overseas investors to allocate assets denominated in RMB. On January 31, 2018, Bloomberg formally confirmed the inclusion of Chinese bonds into the Bloomberg Barclays Global Composite Index from April 2019. On September 4, 2019, JP Morgan announced it would include China bonds into its Emerging Market Bond Indexes with a weight capped at 10%, effective on February 28, 2020.

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