Increasing Competition among Markets
for Offshore Renminbi Business
Eiichi Sekine
Chief Representative, Beijing Representative OfficeNomura Institute of Capital Markets Research

Masanobu Iwatani
Financial Industry Analyst,
Nomura Institute of Capital Markets Research

I.

Publication of report “London: a center for renminbi
business”

1. Issue of renminbi bond by HSBC
On 18 April 2012 HSBC announced that it had issued a renminbi bond in London.
The issue amount was RMB2 billion; the maturity was three years; and the coupon
was 3%. The issue amount was originally RMB1 billion. However, HSBC decided to
double the amount in response to an unexpectedly large increase in demand.
Renminbi bonds issued in Hong Kong are popularly known as “dim sum bonds.” A
number of large European companies such as BP and Volkswagen have issued suchbonds. However, HSBC was the first company to issue a renminbi bond outside Hong
Kong since an offshore renminbi market was established there in 2004 (see below).
According to a Bloomberg report on the same day as HSBC’s announcement, 60%of the issue was sold to investors in Europe, 20% to investors in Hong Kong, 15% toinvestors in Singapore, 2% to investors in the Middle East, 2% to investors in Asia,
and 1% to investors in the US. Furthermore, 46% of the issue was taken up by privatebanks, 37% by fund management companies, and 13% by banks.
In addition, the issue was listed on the London Stock Exchange. This wasapparently to facilitate the bond’s sale to retail investors as well as to private banks(see above). It will also enable the bond to be traded during London trading hours.
The issue is significant in that it takes advantage of London’s institutional infrastructure
and position as an international financial center to offer a financial product toinvestors without a QFII license or quota. Moreover, as with issuing a dim sum bondin Hong Kong, it enables a global company to raise renminbi funds on more favorable
terms than in mainland China.

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Nomura Journal of Capital Markets Autumn 2012 Vol.4 No.2

2. Support from private-sector-led London-Hong Kong International RMB
Forum
There were a number of events leading up to the HSBC bond issue. During thevisit of the UK Chancellor of the Exchequer, George Osborne, to Hong Kong on 16
January 2012 the UK Treasury and the Hong Kong Monetary Authority (HKMA)
announced that an agreement had been reached on forming a joint private-sector
forum 1 to facilitate the development of offshore renminbi markets. The forum’s
members were to be representatives of HSBC, Standard Chartered, Deutsche Bank,
Barclays, and Bank of China (BOC) from both London and Hong Kong.
It was also announced that the HKMA would extend the operating hours of its
offshore renminbi payments system from 10 to 15 hours, closing at 11.30 instead of
6.30, in order to overlap better with trading in London and make it easier for renminbi
transactions in London to be settled. As a result, there would be no risk of a shortageof renminbi funds in London (e.g., to pay for HSBC’s renminbi bond).

3. Publication of report “London: a center for renminbi business”
The HSBC bond issue was not an isolated event. Its timing was coordinated withthe publication by the City of London of a report ("London: a center for renminbi
business”) 2 intended to promote London as “the leading western renminbi hub,”complementing the roles of Hong Kong and other offshore renminbi centers.
The driving force behind this was the five member banks of the London-Hong
Kong International RMB Forum supported by the City of London (“City of London
initiative on London as a center for renminbi business”). The UK Treasury, the Bankof England and the Financial Services Authority (FSA) have observer status at theforum.
The report identifies four advantages that, in its view, London would enjoy as awestern renminbi center: (1) a working day (time difference) that overlaps with that ofChina and Hong Kong; (2) well respected legal and regulatory systems; (3) a global
financial community with a strong history of innovation; and (4) massive institutionalliquidity, one of the factors behind London’s strong positions in the forex market andinternational bond issuance.
In the next section we summarize London’s position as an offshore renminbi
market, using data from the above report.

1

2

For the UK Treasury press release, see http: //www.hm-treasury.gov.uk/press_04_12.htm.
For the HKMA press release, see http://www.hkma.gov.hk/eng/key-information/pressreleases/2012/20120116-3.shtml
http://www.cityoflondon.gov.uk/business/economic-research-and-information/researchpublications/Documents/research-2012/London- a%20centre%20for_renminbi_ business_
accessiblePDF_Final5.pdf

Increasing Competition among Markets for Offshore Renminbi Business2II. London as an offshore renminbi center
1. London and the internationalization of the renminbi
Efforts by the Chinese authorities to internationalize the renminbi began several
years ago in Hong Kong, which has close links with mainland China. Their main aims
were to foster the use of the renminbi to settle transactions with East and Southeast
Asian trading partners to reduce the foreign exchange risk faced by mainland Chinesecompanies and to establish an offshore renminbi market in Hong Kong to provide
opportunities to invest in the renminbi offshore. As far as the first aim is concerned,
the use of the renminbi to settle trade transactions was introduced in July 2009 andhas been gradually extended. Most of the transactions are with Hong Kong. As far as
the second aim is concerned, it has been possible to open a renminbi deposit accountin Hong Kong since 2004 and to issue renminbi bonds there since June 2007. The
number of issuers has gradually increased.
The internationalization of the renminbi has therefore been centered on Hong Kong
(Figure 1) thus far. Since 2011, however, there have been moves to enable offshore
trading in renminbi and establish offshore renminbi markets (in addition to that in
Hong Kong). At the September 2011 UK-China Economic and Financial Dialogue in
London Mr Osborne and Chinese Vice Premier Wang Qishan discussed the possibilityof trading renminbi in the City of London, while, in January 2012, Mr Osborne andhis Hong Kong opposite number, Norman Chan, Chief Executive of the HKMA,
announced an agreement to cooperate on the development of offshore renminbi
Figure 1: Main developments in the internationalization of the renminbi
from a London perspective
Date

Event

January 2004

・Customers allowed to open renminbi deposit accounts in Hong Kong
・Bank of China designated as clearing bank for renminbi business in Hong Kong

June 2007 Issuance of renminbi bonds permitted in Hong Kong
July 2009 Pilot scheme announced to use renminbi to settle trade transactions
・Scope of renminbi settlement of trade transactions widened
Jun-Jul 2010 ・Companies allowed to open renminbi bank accounts
・Rules governing offshore issuance of renminbi bonds relaxed
September 2010 Customers of offshore banks allowed to open renminbi accounts to settle transactions
January 2011 Chinese companies allowed to use renminbi to make outward direct investments
March 2011 Eight offshore banks given access to Chinese interbank bond market
・Vice Premier Li Keqiang supports proposal to establish offshore renminbi center in Hong Kong
August 2011

・Rules governing repatriation of renminbi for inward direct investment clarified
・Renminbi qualified foreign institutional investor (RQFII) program allows mainland Chinese securities
companies to invest in mainland Chinese securities via their Hong Kong subsidiaries

September 2011

UK Chancellor of the Exchequer George Osborne and his Chinese counterpart, Vice Premier Wang
Qishan, welcome private-sector initiative to establish offshore renminbi center in London

December 2011 City of London announces initiative to establish renminbi center in London
・UK Chancellor of the Exchequer George Osborne and HKMA Chief Executive Norman Chan announce
January 2012 agreement to cooperate in developing offshore renminbi business・HKMA proposes to extend operating hours of offshore renminbi payments system

Source:3

Nomura Institute of Capital Markets Research, from City of London, “London: a center forrenminbi business” (April 2012).

Nomura Journal of Capital Markets Autumn 2012 Vol.4 No.2

markets. With the internationalization of the renminbi about to expand from Hong
Kong to the rest of the world, London is making a bid, as part of the City of London
initiative on London as a center for renminbi business, to expand as an offshore
renminbi center with the help of the Chinese and Hong Kong authorities.

2. London as an offshore renminbi center
1) Bank deposits
As of end-2011, more than RMB109 billion was deposited with banks in London.
Of these, deposits in accounts for personal, corporate and institutional customers(customer deposits) amounted to RMB35 billion , while interbank deposits amounted
to RMB74 billion. Although this is less than a fifth as much as the renminbi customer
deposits in Hong Kong banks at end-2011 (RMB589 billion), the report points out that
there has been a substantial increase in a relatively short space of time and considers
that London has a promising future as a renminbi center not only in forex but also ininvestments provided the pool of renminbi liquidity continues to grow.

2) Retail banking
Of the banks surveyed in the report, 64% offer renminbi accounts to retailcustomers in London. Of these, 57% offer regular personal accounts while 43% offer
private banking accounts. The only services offered to retail banking customers inrenminbi at the moment are savings accounts (RMB155 million), deposits (RMB107
million), and payments/transfers (RMB496 million). However, credit card services area potential new area as the demand for credit increases (Figure 2).
In contrast, the pool of private banking accounts is considerably larger (RMB3.6
billion), indicating strong demand from high net worth individuals for renminbi
products and the ability to trade in them. At the moment, however, only one bankFigure 2: Renminbi retail banking services (as of end-2011)(RMB100mn)
40

36

35
30
25
20
15
10
4.96

2.62

Payments/transfers

Deposits/savings accounts

50Source:Private banking

Nomura Institute of Capital Markets Research, from City of London, “London: acenter for renminbi business” (April 2012).

Increasing Competition among Markets for Offshore Renminbi Business

4

offers investment services in equities to its retail clients, and just two banks facilitate
trading in dim sum bonds. There is therefore scope to offer a wider range of services.

3) Corporate banking
Most of London’s corporate banking customers are likely to be companies with a
trading or investment relationship with China. Of the banks surveyed, 64% offer
corporate accounts in renminbi with the total amount of cash in these accounts at theend of 2011 being RMB31 billion. Of these, 36% offer treasury management services,
82% forex services (amounting to a total of RMB60 billion for 2011), and 36%
overdraft facilities. During 2011 a total of RMB280 million in commercial loans wasmade to companies by four London-based banks.
With regard to trade-related services in renminbi, 64% of the banks surveyed offer
facilitated letters of credit, 45% offer supply chain services, and 73% import/export
services. As an international business center, London enjoys a high demand for traderelated transactions in renminbi. The view is therefore that there are likely to more
opportunities in corporate than retail banking.

4)

Institutional and interbank market(1) Foreign exchange services and risk management products
Because of currency controls, offshore trading in the renminbi is restricted. As aresult, most trading of the renminbi in London is in non-deliverable products. In 2011
the average daily trading value of non-deliverable renminbi products in London was$8.53 billion, 64% ($5.5 billion) of which was in forwards (Figure 3).
Figure 3: Breakdown of renminbi forex transactions
Non-deliverables

Deliverables
Forex options
6%

Other
1%

Forex options
31%

Forex swaps
36%
Forwards
64%

Forex swaps
4%

Source:

5

Other
1%

Spot
transactions
26%

Forwards
31%

Nomura Institute of Capital Markets Research, from City of London, “London: acenter for renminbi business” (April 2012).

Nomura Journal of Capital Markets Autumn 2012 Vol.4 No.2

In contrast, the average daily trading value of deliverables was $2.55 billion. Of
this amount, $680 million was accounted for by spot transactions. This is 26% of thetotal for offshore spot transactions in renminbi and the second-largest amount after theestimated figure for Hong Kong ($1.5 billion). The total trading amount increased by
25% in the six months to October 2011. London is also an international center for
trading in emerging market currencies. Trading in the renminbi has now reached acomparable level (Figure 4). As China eases its currency controls and offshore
liquidity in renminbi increases, a shift from non-deliverable to deliverable products
can be expected.

(2) Borrowing and financing products (renminbi bonds)
Of the banks surveyed, 36% offered a renminbi bond issuance service. This
activity totaled RMB7.1 billion in 2011. All renminbi bonds issued outside mainland
China prior to the HSBC bond were issued in Hong Kong, although there was some
distribution to western investors through European sales desks. BP’s renminbi bondissued in 2011 was the first such bond to be listed on the London Stock Exchange.
Therefore, although the issuance of renminbi bonds in London has started, it is still at
an early stage, as is the very issuance of renminbi bonds offshore.

(3) Investment products
The main renminbi financial products available to institutional investors in London
are time deposits, certificates of deposit, and dim sum bonds. Of the banks surveyed,
45% offered time deposits and certificates of deposit in renminbi. The annual volumeof this business in 2011 was RMB74 billion. Of the banks surveyed, 55% offeredtrading in dim sum bonds. The annual volume for this business in 2011 was RMB28
billion.

Figure 4: Forex transactions in emerging market currencies in London
Average daily transaction volume ($mn)
Non-deliverable forwards

Non-deliverable options

Renminbi

5,500

2,600

Real

6,168

1,815

Won

6,309

1,151

Ruble

1,497

800

Rupee

4,627

492

Source:Nomura Institute of Capital Markets Research, from City of London,“London: a center for renminbi business” (April 2012).

Increasing Competition among Markets for Offshore Renminbi Business6

(4) Custody and prime brokerage services
Of the banks surveyed, 18% offered custody services in renminbi, while 18%
offered prime brokerage services.
The three main global custodian banks provide custody services in renminbi but act
globally so they can serve clients from London without the need to open renminbi
accounts in London. London is an important platform for custody services and islikely to see the demand for them grow if the renminbi becomes more widely used byinvestors.
The annual volume for 2011 in renminbi prime brokerage services was RMB94
billion. As London is a center for hedge funds and investment funds, the potential
demand for these services is probably very large.

III. The Tokyo market and offshore trading in the renminbi
1. London’s perception of its role
London’s perception of its role as an offshore renminbi market appears to be that itshould be complementary to that of Hong Kong and should focus on meeting andstimulating the demand for forex trading services and financial products such as
bonds, especially from European investors.
HSBC, a member of the private-sector-led Hong Kong-London forum, has
explained its decision to issue a renminbi bond in London as a contribution to bothpromoting London’s status as an international center for renminbi business and tointernationalizing the renminbi, and revealed that it consulted not only the UK andHong Kong financial authorities but also the mainland Chinese financial authorities
and mainland Chinese financial institutions.
Although the mainland Chinese financial authorities talk about “facilitating the useof the renminbi for trade and investment,” we think they probably see the efforts by
the UK government and private sector to extend the use of the renminbi for crossborder settlement from Hong Kong to other parts of the world as a major contribution
to the renminbi’s internationalization.

2. Efforts to establish an offshore renminbi market in TokyoAs for establishing an offshore renminbi market in Tokyo, the Japanese prime
minister, Yoshihiko Noda, and the Chinese premier, Wen Jiabao, agreed at theirsummit on 25 December 2011 to improve cooperation on developing the twocountries' financial markets (Figure 5).
In the four months from end-December 2011 to April 2012 there were benefits forJapanese financial institutions and Japanese companies both specifically as a result of
this agreement and as a result of more general deregulation in China.

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Nomura Journal of Capital Markets Autumn 2012 Vol.4 No.2

Figure 5: Enhanced Cooperation for Financial Markets Development
between Japan and China (Fact Sheet)Preamble

To support the growing economic and financial ties between Japan and China, the leaders ofJapan and China have agreed to enhance mutual cooperation in financial markets of both countries
and encourage financial transactions between the two countries, specifically in the following areas,paying attention to the principle that these developments should be market-driven.
I. Promoting the use of JPY and RMB in cross-border transactions between Japan and China.
・ Facilitating trade settlement in JPY and RMB to reduce foreign exchange risks and transaction
costs for exporters/importers in both countries; and・ RMB-denominated FDIs from Japan to Mainland China, including to subsidiaries of Japanesecompanies.
II. Supporting the development of direct exchange markets between JPY and RMB;
III. Supporting sound development of JPY and RMB bond markets.

Items ofagreement

・ ①RMB-denominated bonds issued by Japanese companies in Tokyo and other overseas
markets;②and RMB-denominated bonds issued by Japan Bank for International Cooperation in mainland
China markets as a pilot program; and・ Application process is underway for the Japanese authority to invest in Chinese government
bonds.
IV. Encouraging the private sector to develop JPY-denominated and RMB-denominated financial
products and services in the overseas markets; andV. Establishing “Joint Working Group for Development of Japan-China Financial Markets” topromote mutual cooperation in the above-mentioned areas.

Other items

Source:In addition, we agreed to accelerate the ASEAN+3 financial cooperation, including introducing theregional crisis prevention function and further strengthening the crisis resolution mechanism of
CMIM.

Nomura Institute of Capital Markets Research, from Ministry of Finance and PBOC data

Examples of the former are (1) Mitsubishi Corporation (China)’s registration in
December 2011 of a program for issuing renminbi commercial paper in mainland
China and subsequent use of that program (December 2011-January 2012), (2)Mizuho Corporate Bank’s registration in February 2012 of a program for issuingrenminbi bank debentures in mainland China, and (3) the granting of QFII licenses toindividual financial institutions (Meiji Yasuda Asset Management, Sumitomo Mitsui
Banking Corporation, Tokio Marine Asset Management, and Okasan AssetManagement).
Examples of the latter are (1) an extension of the use of the renminbi for trade
settlement to all mainland Chinese exporters (March 2012), (2) an increase in theinvestment quota for all QFIIs from $30 billion to $80 billion (April 2012), and (3) anincrease in the investment quota for all renminbi qualified foreign institutional
investor (RQFIIs) from $20 billion to $50 billion (April 2012).
In addition, the Japanese government has (1) arranged the first meeting of a joint
working party to foster the development of financial markets in Japan and China inaccordance with the December agreement (February 2012) and (2) obtained a quota
from the Chinese authorities for purchasing Chinese government bonds (March 2012).

Increasing Competition among Markets for Offshore Renminbi Business8

3. Potential of Tokyo market
Although these eight developments are evidence that the December agreement
produced concrete results, either directly or indirectly, during those four months, it has
yet, as the agreement envisages, to lead to the issue of renminbi bonds by Japanesecompanies on the Tokyo market.
However, China is both the largest destination for Japanese exports and the largest
source of Japanese imports (Figure 6). Similarly, Japan is the largest source ofChinese imports. In 2010 China imported $176.7 billion worth of goods from Japan,
equivalent to 12.7% of its total imports. Therefore, if a growing number of Chinesecompanies settle their purchases from Japanese companies in renminbi, the Tokyo
market could see a corresponding increase in renminbi deposits. It is therefore
possible to envisage a growing demand for renminbi bonds either in Tokyo or (viaTokyo) in Hong Kong as a means of investing the renminbi deposits in Tokyo. It isalso possible to envisage that some of these deposits could flow back to the Chinese
mainland in the form of direct investment rather than as bond investments. In 2011,
Figure 6: Japanese and Chinese imports and exports
by source and destination (2010)<Japanese export destinations>
AmountTrading partner($100mn)
1 China
2 US
3 Korea
4 Taiwan
5 Hong Kong
6 Thailand
7 Singapore
8 Germany
9 Malaysia
10 Netherlands

1,491
1,182
621
522
421
341
251
202
176
163

<Chinese export destinations>
AmountTrading partner($100mn)
1 US
2,833
2 Hong Kong
2,183
3 Japan
1,211
4 Korea688
5 Germany
681
6 Netherlands497
7 India
409
8 UK
388
9 Italy
311
10 Taiwan
297

Source:

9

Share
19.4%
15.4%
8.1%
6.8%
5.5%
4.4%
3.3%
2.6%
2.3%
2.1%

Share
18.0%
13.8%
7.7%
4.4%
4.3%
3.2%
2.6%
2.5%
2.0%
1.9%

<Japanese import sources>
AmountTrading partner($100mn)
1 China
2 US
3 Australia
4 Saudi Arabia
5 UAE
6 Korea
7 Indonesia
8 Taiwan
9 Malaysia
10 Thailand

1,528
672
450
358
292
285
281
230
226
210

<Chinese import sources>
AmountTrading partner($100mn)
1 Japan
1,767
2 Korea
1,384
3 US
1,020
4 Taiwan
1,157
5 China
1,068
6 Germany
743
7 Australia
609
8 Malaysia
504
9 Saudi Arabia
328
10 Brazil
381

Share
22.1%
9.7%
6.5%
5.2%
4.2%
4.1%
4.1%
3.3%
3.3%
3.0%

Share
12.7%
9.9%
7.3%
8.3%
7.7%
5.3%
4.4%
3.6%
2.4%
2.7%

Nomura Institute of Capital Markets Research, from Japanese Ministry of Finance trade
statistics and Chuugoku Jouhou Handobukku 2011 (China Data Handbook 2011) (inJapanese).

Nomura Journal of Capital Markets Autumn 2012 Vol.4 No.2

for example, inward direct investment in China by Japanese companies amounted to$6.35 billion, the third-largest amount after Hong Kong and Taiwan (Figure 7).
Unlike the agreement between the UK and China, the December agreement does
not contain any reference to fostering an offshore renminbi market (in Tokyo).
Whereas London has been promoting itself as an offshore renminbi market on thebasis that its trading hours complement those of Hong Kong, we think Tokyo’s
potential lies in the scale of the likely non-speculative demand for renminbi (e.g., fortrade and direct investment).
At a time when being able to offer products and services in renminbi adds to theattractiveness and competitiveness of any international financial center, it will beinteresting to see to what extent Japanese companies and financial institutions use theTokyo market to issue renminbi bonds.
Figure 7: Inward direct investment in China (2011)

1

Hong Kong

77,011

Share
（%）
66.4

2

Taiwan

6,727

5.8

3

Japan

6,348

5.5

4

Singapore

6,328

5.5

5

US

2,995

2.6

6

Korea

2,551

2.2

7

UK

1,610

1.4

8

Germany

1,136

1

9

France

802

0.7

10

Netherlands

(cf.)

EU

Ranking

Country/region

Global total

Source:Amount
($mn)

767

0.7

6,348

5.5

116,011100

Nomura Institute of Capital Markets Research, from Chinese Ministry ofCommerce data

Increasing Competition among Markets for Offshore Renminbi Business10