RGI dips for second consecutive month
(10 July 2015 – Asia) Standard Chartered announced that the Standard Chartered Renminbi Globalisation Index (RGI) fell 0.24 percent month-on-month in May to 2145, from a revised 2150 in April – this is the first time the index has contracted for a second consecutive month since its inception in December 2010.
Trade settlement drove RGI growth in May, adding 0.64ppt to growth after having detracted 0.34ppt in April.
The share of Renminbi (RMB) denominated cross-border payments rose to 1.58 percent of global flows in May.
Twenty three percent of China’s total goods trade was settled in RMB in May.
Standard Chartered is forecasting that the RMB’s share will increase to 38 percent by 2017 and that 46 percent of China’s total trade will be denominated in RMB by 2020.
In addition, China’s pre-eminence as a commodity importer is also likely to further the use of the RMB as a major trade currency and we expect more commodity suppliers to turn to RMB settlement.
The Bank also forecasts that the RMB will move to the third most used international currency by 2020 from its position as the eighth currently, surpassing the Japanese yen and the British pound.
Dim Sum bonds offset the increase from trade settlement in May, detracting 0.74ppt from the RGI.
“However, we expect Dim Sum bonds to be well supported in July, despite potentially higher market volatility amid the situation in Greece and a potential rebound in USD-CNH CCS,” Standard Chartered said.
“The market recovered in Q2 on a revival in primary issuance and a drop in average yields.”
Primary issuance was CNY45 billion (A$9.75 billion) in June – CNY23.5 billion in Dim Sum bonds, CNY17 billion in certificates of deposit (CDs), and CNY4.4 billion in Formosa bonds.
“We expect primary issuance of CNY250-270 billion in H2 2015 and maintain our full-year issuance forecast of CNY480-500 billion.
“For this reason we believe the RGI is close to bottoming,” Standard Chartered said.
The recent wave of policy liberalisation steps will likely be reflected in May-June data and the Bank said the recent lull is temporary and that the RGI will start rising in H2 2015.
The People’s Bank of China (PBoC) announced in early June that it will allow offshore RMB clearing banks and settlement banks to access China’s onshore repo market, using cash bonds purchased under the PBoC China interbank bond market (CIBM) programme as collaterals.
It will allow proceeds to be repatriated for offshore usage.
Standard Chartered believes this will likely allow CNH liquidity condition to improve over time and to be more correlated with onshore interbank liquidity conditions going forward.
“In addition to the PBoC’s strong commitment to keep onshore liquidity accommodative, we expect the Chinese authorities to reform the exchange rate system further, to facilitate greater two-way volatility.
“We forecast that the band will widen to +/- 3 percent by end-2015 and to +/- 5 percent by end-2017.