The rise of the redback

NZ dairy giant Fonterra is poised to fund future Chinese investments in renminbi (RMB) as China takes the next steps towards liberalising its currency.

At the first RMB Australasian Summit in Sydney, Fonterra CFO Jonathan Mason said Fonterra would consider issuing RMB bonds to finance its expansion within China.

"It's natural for a company like us to issue a yuan (RMB) bond to finance our investment in China as we can have the local currency to match our investment there.

"If we raised funds in US dollars or other currencies but needed to invest in yuan there would be uncertainty on the exchange rate swings."

China took its first steps on the liberalisation path in June 2009 with a trade settlement scheme. It followed by creating the first offshore RMB centre in Hong Kong, enabling the emergence of various investment vehicles in which RMB funds could be held outside China. Liquidity is growing rapidly with the "dim sum" bond market alone expected to surpass RMB100 billion in 2011. Within the region major corporates are preparing to accept RMB payments from their Chinese counterparts, and/or to access RMB bonds to raise funds to invest in China.

The Chinese Government is nudging its own firms to settle deals with offshore parties in RMB as it conditions them for what most experts predict will lead to a decision to allow full convertibility of the country's exchange rate.

Says a banking insider, "China is looking to target first those that already have a relationship with China. That's how you influence. You tell your big buyers to only pay in RMB and Fonterra will accept it because they quite like getting paid."

"China is on this path and it is moving. China's big and when it moves you either get run over or go with it."

The de facto currency war which China and the US have played for the best part of a decade has taken a new twist since the global financial crisis. The US argument that China has scored an unfair advantage by artificially managing its currency to increase gains for its own companies, morphed into a "tit for tat" game as the US Fed's cheap money policy took the steam out of the greenback. It is in China's advantage to move to a more flexible stance and, over time, establish the "redback" as a leading global currency.

ANZ Group chief executive Mike Smith says there is no doubt that as the renminbi internationalises and moves to full convertibility it has the power to become a reserve currency.

"When that happens all trade flows in this part of the world will be done in RMB. That will be it."

In 2010, 16 issuers - including some big US brands with extensive investments in China such as McDonald's and Caterpillar - joined names such as the ADB and the Chinese Ministry of Finance in issuing "dim sum" bonds.

The action is not just at the big end of town. At HSBC's Auckland head office, Cath Henry is enthusiastic about the China game. "In 2020, when you are watching breakfast TV, RMB will be quoted as a rate."

Henry, head of global payments and cash management at HSBC (NZ), says the value of RMB bonds is increasing massively and "will continue to do so."

She notes the World Bank lent authority to the burgeoning currency earlier this year when it issued an RMB bond. "They chose us to do payments and cash management around that bond issue."

Even ordinary New Zealanders can open a Chinese-currency-denominated retail account which should help strengthen awareness of the "redback" compared to the US dollar or "greenback."

Henry warns you just can't make payment in RMB into China. "You have to check if the third party can accept it. The documentation has to be in place."

Norman Chan, chief executive of the powerful Hong Kong Monetary Authority, used the RMB summit to chart a path for the RMB's rollout.

The Chinese Government decided in its recent five-year plan that Hong Kong should be China's offshore financial centre. Chan said with China "becoming the second largest trading nation and economy, specifically with external trade surpassing US$3 trillion in 2010 and direct investment activities also growing significantly over the past decade, the use of RMB in cross-border transactions is likely to expand very rapidly in the future."

"The wider use of renminbi will greatly enhance all these bilateral trade and investment flows as it helps reduce currency conversion costs and exchange rate risks," he said.

Chan's mantra - China will pursue the internationalisation of the RMB in its usual "step by step" and "trial and error" mode - could not disguise the fact that the rollout is proceeding fast.

The summit was the first of a series of of overseas roadshows the authority is conducting to showcase Hong Kong as China's one-stop financial platform for offshore RMB businesses ranging from RMB trade settlement services, bank financing and bond issuance to wealth management.

As China's global financial centre, Hong Kong is also leveraging its advantages in conducting activities in asset management, offshore RMB business and capital formation, attracting and anchoring capital and talent from within and outside the country

ANZ forecasts the RMB is expected to gain 5 to 6 per cent in 2011, and the interest rate is likely to be raised several times as well - so holding RMB is still very attractive.

Says Smith - who is leading ANZ's push to build a regional bank - the key question for New Zealand and Australia is "how do we get a piece of the action?"

HSBC has a pervasive network in China. But ANZ recently opened its latest China office in Chongqing, and will add another city later in 2011 as part of the country roll-out. Shanghai-based Grant Knuckey says a couple of ANZ "sub-branches" will also be added (more akin to a "branch" in NZ banking parlance. In China, a "branch" refers to the head office in a city). "Over the next 5-6 years we plan to expand to a total of 10 cities," says Knuckey." This is consistent with our decision to locally incorporate as a Chinese entity in last year."