Ravi Menon: China-Singapore financial connectivity
Central bank: mas | Type: speech | Date: 2016-06-07

## Ravi Menon: China-Singapore financial connectivitySpeech by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the 2nd RMB Internationalisation Summit, Singapore, 7 June 2016.*

*

*Mr Jiang Jianqing, former Chairman of Industrial and Commercial Bank of ChinaHis

Excellency

Mr

Chen

Xiaodong,

Ambassador

of

the

People's

Republic

of

China

to SingaporeDistinguished guests, ladies and gentlemen, good morning.I am happy to join you and would like to thank ICBC for the invitation.

## China's economic transformationChina's economy is at a major inflection point, balancing three objectives.- First, to manage a moderation in its economic growth without undue disruption.- Second,

to

resolve

vulnerabilities

in

its

economy

and

financial

system

without triggering a crisis of confidence.- Third, to implement perhaps the most comprehensive and ambitious structural reform programme of any country in modern times.In the short term, these three objectives may at times be in conflict, presenting a trilemma of difficult trade-offs for policymakers.

But if successfully executed, they are mutually reinforcing and will lay the foundation for a more sustainable and vibrant economy.China's economic restructuring has deep implications for Asia.

A new configuration - a new regional value-chain - is taking shape across the region, driven by three features of China's economic transformation.First ,

China

is

shifting

from

a

labour-intensive

industrial

structure

to

a

more

skill

and technology-intensive one.- China is inshoring more high value-added production within China.

This obviously poses challenges for competing high value-added producers in Asia.- But

China

is

also

offshoring

lower

value-added,

labour-intensive

production.

This creates opportunities for the less-developed regional economies to catalyse their own industrialisation.Second , China's import composition is shifting in favour of consumer goods and services.- The more developed economies in the region are well-positioned to tap into China's demand for financial services, healthcare, education, and tourism.Third , China is emerging as a significant source of capital for the region.- In the middle of last year, while the world's attention was focused on the volatility in China's

financial

markets,

an

important

development

took

place

that

went

largely unnoticed.- China became, for the first time, a net exporter of direct investment.- Chinese FDI in ASEAN has been increasing by an average of 25% every year, in the five years to 2014.Vietnam and Cambodia are examples of countries that have become more plugged into the global markets as a result of becoming part of this new regional value chain.- Vietnam has emerged as a key assembly hub for electronic and electrical products.- Cambodia

has

become

a

manufacturing

base

for

Chinese

garment

and

footwear companies, with three-quarters of its garment and footwear exports in 2014 headed for Europe and the United States.

## Future of RMB internationalisationChina has embarked on the formidable task of liberalising the capital account at a time when domestic growth is slowing, its financial system is still maturing, and US monetary policy is normalising.

The process has therefore entailed careful calibration and periodic reassessment - crossing the river by feeling the stones.Since 2010, the offshore RMB market has experienced remarkable growth, driven by strong investor appetite and cross-border trade.

In the near term, however, the trajectory of RMB internationalisation is likely to moderate, due to a confluence of factors.First , global trade, which is a key factor driving the overseas use of the RMB, has declined.- Merchandise trade flows between China and its trading partners are expected to be modest in the next year or so, reflecting cyclical headwinds.Second ,

market

expectations

of

China's

GDP

growth

affect

expectations

of

the

RMB's appreciation or depreciation.- As the

Chinese

authorities

forge

ahead

with

fostering

a

more

market-based

RMB exchange rate, greater two-way volatility can be expected, compared to what appears to have been a one-way trend appreciation in the past.- This

could

have

a

bearing

on

investors'

expected

returns

on

RMB

deposits

and financial assets, and therefore their demand for offshore RMB.Third , the liberalisation of China's capital account is likely to proceed cautiously in the near term.- Policymakers will be more cautious in the short-term as they work to ensure that the market volatility and ensuing capital outflows in late 2015 and early 2016 do not have a lasting impact on market confidence.But I believe the Chinese authorities remain committed to liberalising the capital account and promoting the international use of its currency in the medium term.- The latest 13th Five-Year Plan, announced in March this year, has made clear the aim to reduce foreign exchange restrictions for both corporates and households and encourage the use of the RMB in cross-border payments and international reserves.Progress in RMB internationalisation will ultimately depend on getting right the sequencing of domestic economic and financial reforms.

A strong and stable domestic financial system is a prerequisite for further capital account liberalisation and currency internationalisation.

## China-Singapore financial connectivity: the journey so farSingapore's financial linkages with China have grown strongly over the years, particularly since the appointment of ICBC as Singapore's RMB clearing bank in February 2013.- The offshore RMB market in Singapore has expanded, with a wide offering of RMB products, including deposits, bonds, derivatives, mutual funds, and trade financing.- China

and

Singapore

have

set

up

cross-border

RMB

arrangements

for

Suzhou, Tianjin and Chongqing, enabling corporates in these areas to borrow from Singaporebased

financial

institutions

as

well

as

repatriate

proceeds

from

bonds

issued

in Singapore.But China comes to Singapore not only to do business in Singapore.

It is to use Singapore as a launch-pad to do business in Southeast Asia.In recent years, Chinese corporates and financial institutions have been rapidly growing their operations and investments in Southeast Asia.

Singapore offers an effective gateway for their expansion into the region.- There are some 6,500 Chinese companies in Singapore.- Many of them, such as Lenovo, have set up regional finance and treasury centres here to take advantage of Singapore's banking and capital markets to finance their regional expansion.- The seven Chinese banks in Singapore are also expanding their presence here to provide funding support for the activities of Chinese and regional corporates.Singapore-based

financial

institutions

have

extensive

networks

in

the

individual

ASEAN countries and, have proven to be trusted partners for Chinese entities venturing abroad.- A

recent

example

is

China

Minsheng

Investment

Corporation,

one

of

the

largest private

investment

firms

in

China,

which

set

up

an

office

in

Singapore

with

the mandate to invest in companies in South-east Asia and North America.

One of its first projects is the construction of an industrial park in Indonesia.- Other Chinese companies, such as Baosteel, New Hope and Huaneng, have invested in Vietnam and the region through their Singapore subsidiaries, with financing support from local banks like DBS.

## China-Singapore financial connectivity: the next chapterThe next chapter in China-Singapore financial partnership will go beyond co-operation on RMB business and the use of Singapore as an Asian gateway.

It will be a more broad-based financial partnership that will provide deeper support to China's growing connectivity with Southeast Asia.

Let me cite four concrete areas of partnership.- Capital management- Risk management- Infrastructure financing- Asset management

## Capital managementChinese enterprises have mostly relied on domestic sources of funds such as bank lending to finance

their

international

expansion.

Many

Chinese

companies

have

also

listed

in

equity markets in the US, Hong Kong and Singapore.But as Chinese companies grow their global presence, they will have to think harder about how best to raise capital and how best to make use of their capital by tapping into offshore markets.First , bond markets offer a useful alternative to bank lending, especially for long-term funding.

Deep

capital

markets,

anchored

by

a

large

institutional

investor

base

can

help

well-rated businesses to achieve efficient cost of funding.

Chinese companies are becoming more active in Singapore's bond market.- For

instance,

China

Oilfields

Services

Limited

successfully

raised

US$1

billion

in Singapore last year, including a 10-year medium-term note of US$500 million.Second , Chinese corporates with income-producing real estate and infrastructure assets could recycle their capital by securitising these assets through a trust vehicle.- SGX saw its first China real estate investment trust or REIT last year, with Beijing Hualian Group raising close to S$400m through a REIT.Similarly, Chinese banks can use loan securitisation to recycle bank capital and re-channel the funds to real economic activities back home.- ICBC's opening of its Asia Pacific Shipping Finance Centre is a good example of this.- The

centre

will

help

ICBC

Singapore

securitise

its

shipping

and

related

loans originated in the Asia Pacific, by tapping the Singapore bond market.

## Risk managementAs Chinese corporates continue to venture abroad in Asia, they will confront a variety of risks.

These risks need to be managed well.First , there are the usual foreign exchange and interest rate risks.- As the largest FX market in the Asia Pacific, Singapore offers Chinese corporates effective FX hedging solutions to manage their risk exposures.- The Singapore Exchange has a strong suite of FX futures contracts, including Asian currencies, and the take-up rate has been strong.- Many corporate treasurers have chosen Singapore for their regional treasury centres covering Southeast Asia, and even the Greater China region.Second ,

some

of

the

investments

by

Chinese

corporates

could

be

in

locations

that

are vulnerable to natural disasters.- Investors would need to take into account not only the immediate risk of loss due to a natural catastrophe but also the secondary impact on their supply chains and working capital.- Singapore has a critical mass of specialty insurers who can provide appropriate cover against such natural catastrophe risk.Third , infrastructure projects typically expose investors to significant political and credit risks.- Such risks include defaults and insolvencies of trading partners, regulatory changes, expropriation, labour unrest, and acts of terrorism.- As the largest centre for structured trade credit and political risk insurance in Asia, Singapore can provide Chinese banks and corporates comprehensive and tailored risk management solutions.

## Infrastructure financingChina is playing an increasingly important role in helping regional economies

with infrastructure development through its 'One Belt One Road' initiative.Chinese

corporates

and

financial

institutions

can

tap

into

Singapore's

well-developed infrastructure financing ecosystem in the following ways.- Leverage

on

the

strong

network

of

multilateral

agencies,

banks

and

institutional investors to access regional infrastructure deals.- Deepen their expertise in project structuring, risk allocation, and loan documentation.- Gain

access

to

the

network

of

local

project

sponsors

who

are

traditionally

more accustomed to dealing with local and global banks.

## Asset managementChina is one of the key markets for Singapore-based fund managers, both as an investment destination as well as a source of capital.- There is strong interest from financial institutions here to tap Singapore's RQFII quota and offer investments with China exposures.- Last week, Blackrock secured RMB 20 billion of approved RQFII quota in Singapore, which is the second largest quota granted to-date.At the same time, the Singapore market offers globally diversified investment portfolios for Chinese pension funds, insurance companies, and individuals.- There is a growing cluster of Chinese asset managers that are keen to set up in Singapore,

attracted

by

our

pan-Asian

focus

and

broad

base

of

international investors.- They cover a broad spectrum of investments, ranging from traditional asset managers to hedge funds to private equity funds.

## ConclusionLet me conclude.The biggest story for Asia in the last three decades has been the rise of China.

Asia's biggest story in the next three decades will be the transformation of China.It

will

not

be

an

easy

transition,

as

China

deals

with

the

challenges of debt, deflation, and demographics.

There will be dislocations and bouts of volatility along the way, with spillovers into Asia.

But if China successfully addresses its vulnerabilities and restructures its economy, it will pave the way for more sustained growth and a more advanced economy.The new China that will emerge will open up new opportunities for Asian economies.

The RMB will become more international and Chinese corporates and financial institutions more global.

Singapore

is

well-positioned

to

partner

Chinese

companies

in

their

regional

journey

and deepen China's connectivity to Asia through trade and investment.

The next chapter of ChinaSingapore financial partnership will be exciting and rewarding.I wish you fruitful discussions and a pleasant stay in Singapore.

Thank you.