London’s role as an offshore renminbi hub has survived geopolitical headwinds and the UK’s departure from the European Union. But it could be improved by gaining better understanding of China’s sovereign debt markets and changing the collateral status of Chinese government bonds.
This was the key message from OMFIF’s ‘Building bridges: advancing China-UK economic relations for a sustainable future’ conference, held to discuss the development of the offshore renminbi market in the UK. The event brought together a wide range of distinguished speakers, including senior representatives from commercial banks, investment banks, clearing houses, academia and policy-makers.
Aimin Yang, general manager of China Construction Bank, London branch, set the tone for the day with his opening speech on the notion of renminbi bonds becoming qualified collateral accepted by the UK market. He recommended that the Bank of England’s eligible collateral list be expanded to include onshore and offshore China sovereign bonds denominated in renminbi. His proposal originated from key policy outcomes of the 10th UK-China Economic and Financial Dialogue in 2019.
To integrate renminbi bonds into collateral frameworks, some speakers suggested initiating a pilot project involving a select group of investors that could be expanded to the broader market. This phased strategy allows for meticulous testing and adjustment, ensuring the seamless incorporation of renminbi bonds as collateral. Additionally, exploring the use of green bonds as collateral is a particularly appealing avenue for environmentally conscious investors. The sustainability focus of green bonds aligns with the growing interest in socially responsible investment practices.
Speakers at the conference emphasised the importance of issuers conducting extensive roadshows to boost the global recognition and acceptance of renminbi sovereign bonds. The complexity of the Chinese debt instrument landscape, compounded by adverse media coverage, poses a significant challenge for investors. For example, it could be challenging for foreign investors to distinguish bonds issued by the Chinese central government, local governments and local government financing vehicles, although each is characterised by distinct risk profiles. Renminbi bond issuers need to disclose detailed and transparent information on credit ratings and associated risks, providing guidance for investors navigating the intricacies of the Chinese financial market.
Experts in attendance drew inspiration from the successful practices of European issuers, especially the German government, renowned for its effective roadshows for sovereign issues. This approach involves strategically targeting international investors, including central banks. The goal is to provide a robust platform to showcase the merits and unique features of renminbi sovereign bonds, thereby fostering understanding and interest among potential investors.
Furthermore, providing investors with robust risk management tools, such as interest rate swaps, is crucial for fostering a secure investment environment. The launch of the China-Hong Kong Swap Connect scheme in May 2023 provides a solid foundation for the introduction of effective risk mitigation instruments. These measures collectively aim to diversify collateral options and bolster the attractiveness of renminbi bonds in the financial landscape.
The conference highlighted valuable lessons that the UK could glean from Hong Kong’s successful experience in promoting dim sum bonds globally. Hong Kong is a pioneering example in the field of digital currency. It issued the world’s first tokenised green bond, signalling a significant stride in merging sustainable finance with blockchain technology. Hong Kong’s involvement in the mBridge digital currency project underscores its commitment to exploring novel approaches in the evolving landscape of digital currencies. In a time of uncertainty, international financial centres are strategically repositioning themselves as forward-thinking hubs that contribute to the global discourse on the convergence of traditional finance and emerging technologies.
Chinese companies are increasingly opting for Switzerland over the UK to raise capital through the Stock Connect programme. The decision to choose Switzerland is motivated by favourable tax structures, quicker listing processes and auditing frameworks that align with the requirements of Chinese firms. This trend underscores the dynamic nature of capital markets, as companies navigate diverse regulatory landscapes to optimise their fundraising strategies. It could prompt financial infrastructures and policy-makers in London to review the current regulatory framework and process to make it more attractive to international businesses.
The roundtable concluded with a much clearer roadmap for the future. It is the first step towards the goal of easing access for renminbi bonds as collateral in more business scenarios, enriching the pool of global investors when they experience a shortage of high-quality liquid assets.
Yijun Gu is Deputy Head of Financial Institutions, China Construction Bank, London Branch.