Renminbi Going International & Gaining Traction In Acceptance

It is safe to say that if you have a very liquid portfolio of assets, its wise to put a substantial sum in renminbi deposits or quality renminbi bonds. Before China’s renminbi (RMB) can challenge the dollar, it first needs to be freely available for trade and investment. By internationalising renminbi through offshore financial markets, China is introducing openness and transparency while retaining greater controls over its home market and capital account.



This process has started in some Asian countries and is spreading quickly to other parts of the world.

Bilateral trade between China and the Southeast Asian economic bloc reached a record high of USD400.9 billion in 2012, a year-on-year increase of 10.2 per cent. China is increasingly “near-sourcing” raw materials, components and finished products from within Asia. Trade between these two huge markets will continue to grow and if a sizable proportion of an emerging-market country’s trade is with China, it can make sense to settle that trade in renminbi.

This is already happening in Hong Kong. Cross-border trade settled in yuan increased 6.6 per cent in August to RMB304.2 billion on a month-on-month basis, according to the Hong Kong Monetary Authority. This has helped Hong Kong generate the largest renminbi liquidity pool outside mainland China. Taiwan and Singapore are catching up quickly after setting up clearing services earlier this year.



HSBC Global Research forecasts that by 2015, one third of China’s total trade and half of the trade between China and emerging markets will be settled in renminbi.

Growing offshore use of renminbi is not confined to Asia: Europe is now the largest contributor to renminbi payment growth. According to Swift, London accounts for 28 per cent of offshore transactions settled in renminbi with China and Hong Kong, and RMB settlement has more than doubled in France, Germany and Luxembourg in the past year.

For a currency to achieve investment, and ultimately reserve status, it has to create incentives for foreigners to trade and hold it. It is worth pointing out that trading of the Chinese yuan in global foreign exchange markets has more than tripled from three years ago because of the expansion of the offshore market. Daily turnover in renminbi has increased to USD120 billion from USD34 billion three years ago.



Bilateral trade between China and the Southeast Asian economic bloc reached a record high of USD400.9 billion in 2012

Dim sum bonds opened the door for foreign companies to finance in the Chinese currency.

Chinese regulators have increased the quota for Renminbi Qualified Foreign Institutional Investor (RQFII), which stands at 270 billion yuan (USD44 billion) and around half that had been taken up by last month. The authorities almost doubled the quota of the Qualified Foreign Insitutional Investor (QFII) scheme to USD150 billion as Beijing moves to widen channels for foreign investors to buy mainland stocks, bonds and money-market instruments.

According to the International Monetary Fund, rapid liberalisation of cross-border capital movements could produce over several years net outflows from China equal to 15 per cent of the country's gross domestic product, amounting to some USD1.35 trillion. The holders of China’s vast domestic savings pool may also seek diversification in overseas markets. This would increase global renminbi liquidity, providing another boost to the currency’s internationalisation.

As China’s importance as a trading power increases, some central banks are, or planning to, include renminbi in their reserve portfolios. Taiwan’s central bank has added renminbi assets to its foreign reserves portfolio and the Reserve Bank of Australia intends to hold up to 5 per cent of its reserves in renminbi assets. At the same time, the People’s Bank of China and the European Central Bank have a three-year bilateral currency swap agreement worth 350billion yuan (USD57 billion) to provide further liquidity support for renminbi use overseas. An additional 23 central banks and monetary authorities have signed similar arrangements.

China is now further internationalising its currency by encouraging the development of multiple offshore centres, not only Hong Kong, Taiwan, Singapore and London. Others such as Toronto, Luxembourg, Zurich, Paris, Frankfurt and even Sydney are quickly catching up and will help the renminbi grow.



International currencies should have three basic characteristics: convertibility; broad acceptance and wide use in various areas of international trade, settlement, investment, debt payment; and stable value. Current account convertibility has now been achieved and restrictions on the capital account are being loosened. Renminbi is rapidly becoming not just acceptable but desirable in the mercantile capitals of the global economy and is showing every sign of being a currency of the future.

p/s article published in HSBC.com

Various Investing Methods

After the seminar, someone said that maybe what Koon Yew Yin said about investments and what I said about investing do not quite gel with what Glen Arnold had been talking the whole time.



Well, the seminar was about the gurus of investing, what they did and why they did what they did. Koon Yew Yin shared how he make his investing decisions. They may not be an exact replica of most of the investment methods of the guru but the essence of it remains.


I don't think Mr. Koon or I must follow these methods exactly. We learn from experienced teachers, we take what we think its suitable for ourselves. We may be wrong, so can the gurus. Who is to day Mr. Koon or I may not be able to generate even greater returns than the gurus?


If we were to follow the Fischer or Buffett methods religiously, we might as well just invest in Berkshire Hathaway, why bother learning. Time tested investment methods are tools we can use to our advantage. I do not see Mr. Koon or myself violating much of the principles touted.



Readers of my blog will know I am more of a value-momentum person. Maybe I should write a book, but I do not intend to be a guru. I just write about what I like. If you want me to follow the Grahams and Fischers to the letter, then read their books or invest in funds that religiously do that.


Mr. Koon and I think that it is a good seminar to get more investors to discuss more about the concepts and investment thinking of gurus. You may choose to take as much of it and apply to your investing decisions, and may need to research a bit more diligently.


Nobody is owing anyone a living here. You want to follow what Mr. Koon and I are buying, fine, you don't want to, fine also. You want to be Malaysia's Warren Buffett, go ahead, its all out there the information and tools you need. Good luck to all.

US Long Term Outlook Downgraded

U.S. stock indexes fell sharply Monday after Standard & Poor’s revised its long-term outlook on the U.S. to negative from stable. “Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating,” the ratings agency said in a release.

The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its best rating, AAA, on the U.S.

Relative to Triple-A-rated peers, the U.S. has very large budget deficits and rising government indebtedness, and the path to addressing those issues is unclear, S&P analysts said.

My View: Well, isn't this common investing knowledge? The very same people who rated those subprime loans as AAA right up to when they collapsed, are now being seen as smart experts? I am not debating whether the ratings agencies are correct, and in this case they are. Surely this should not surprise anyone. To be fair, the US markets have to weaken in sympathy with the news even though everybody knows that to be the case.

To me, it should be seen in a positive light. China and Japan are not going to sell Treasuries, even though as an investment pro they should, but they have a lot more to lose by doing that. The ratings downgrade basically gives the US government a fixed 2 year deadline to come up with something instead of just printing and warbling some more. This will give Obama more ammunition to push through tough policy choices.



The writing was on the wall weeks ago when Bill Gross of Pimco dumped all Treasuries from its portfolio. Mind you, Pimco is the world's largest bond fund as well. Pimco has moved their assets to non-US debt, real estate and commodities.

Next was Loomis Sayles, manager of the $19.9bn bond fund, they have moved from Treasuries to high yield bonds (corporate convertibles more likely to be the case). Black Rock, another mega fund manager, has shifted to shorter term Treasuries. Even Warren Buffett has shifted his portfolio at Berkshire Hathaway, for securities maturing in less than a year from 16% of total portfolio to 23%.

What they are all doing is getting out of most Treasuries, especially the longer dated ones. This is in anticipation of a massive climb in interest rates for longer term Treasuries in the coming months and years. This implies that the US will find few takers the next few times they try to sell their long bonds to raise funds, thus forcing them to hike the interest rates for them to find takers.

That means the US dollar will be on a downtrend for the longest time and will not find takers of US denominated debts unless the interest rates are more appealing. This is also good as it forces them to come to terms with their deficits and reckless quantitative easings.

How will it affect stocks? Well, US stocks will have a kneejerk reaction but not much. The indebtedness is largely on the government side and not from the corporate side. Technically, the dollar will weaken which will be better for most US products and services.

Now, this will have a massive potential effect on the HKD peg. Its pointless to say that almost everyone is in agreement that the HKD is undervalued enormously. If the value of USD drops significantly and persistently over a long period, the HKMA may be able to brush it off. But when US rates start to rise appreciably, thus importing inflation significantly into HK's economy, something's gotta give. The longer HKMA does nothing, the more hot money will pour into HK in anticipation of an appreciation to the peg or free floating it (possibly a 10%-15% increase if they were to float the HKD now, the longer it goes on, the higher the quantum and hence the pressures).

The ratings downgrade will be good for emerging markets, well good in the shorter term (6-12 months), but bad as it will exacerbate the already excessive liquidity in many emerging markets. We should see a continued surge in US funds getting more exposure into non-US securities in the coming weeks and months.



Thankfully, the USD is not as important as it was to most Asian economies as it was maybe 10-20 years ago. More importantly for us, its the Chinese yuan. Thankfully again, most emerging markets are doing more business with each other and not just Europe or the US. Hence the macro calamities in Europe and the US would mean more funds moving to "performing emerging markets". That said, emerging markets will now have to deal more effectively with hot money and excessive liquidity running up assets of all kinds.