A Delicate Stage: The Future of Renminbi as a Global Investment Currency

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A delicate stage:
Thefutureof therenminbiasa
globalinvestmentcurrency
A report from The Economist Intelligence Unit

© The Economist Intelligence Unit Limited 20151
A delicate stage: The future of the renminbi as a global investment currency
Contents
Executive summary 2
About the research 5
Introduction: Taking stock of reform 6
Driving and enabling usage 6
Fully convertible in five years 8
The PBOC speaks: Not far away from convertibility… but not near, either 9
Demand drivers: Undoubted potential 10
Growing RMB-related revenues 10
Focusing on core competencies 11
What’s driving demand? 13
Enabling adoption: Perceived problems 15
Regulatory roadblocks 15
Liquidity and other concerns 17
Enabling adoption: Sought-after solutions 19
The need for legal clarity 19
Let the market work 21
Practicality and prestige 22
Preparing for a global RMB 23
Reluctant to commit 23
It’s still about the guanxi 24
An overseas opportunity 25
The front line of RMB innovation 26
Ready for lift-off 26
Conclusion: Towards a common currency 27
China’s responsibility? 27
1
2
3
4
5

Executive
summary
China’s currency, the renminbi (RMB), is already
internationalised: it ranks fourth globally by value
of payments, behind only the US dollar, the euro
and the British pound. The size of China’s economy
and its dominant position in international trade
mean that its use in transactions is already
commonplace. Yet it is still not comparable to the
four major denominations (including the Japanese
yen) as an investment currency—i.e. one that is
freely usable and enjoys the full confidence of
international investors and the companies that
service them. Without their support, the RMB
cannot reach full maturity.
Until recently it seemed inevitable that China
would take the steps necessary to win their
confidence and that the RMB would soon join this
elite band of global investment currencies. Yet the
events of the summer of 2015, during which
China’s authorities sought unsuccessfully to prop
up a collapsing stock market and also suddenly
devalued the RMB’s exchange rate anchor
(ostensibly to take market forces more into
account), raised questions about the country’s
commitment to liberalising its capital markets.
Doubts were reinforced by successive data points
that suggested its economy was slowing far more
rapidly than expected.
At this crucial juncture, with global hype about
the RMB cooling rapidly, UKTI commissioned The
Economist Intelligence Unit (EIU) to survey over
200 senior executives from financial institutions
about the long-term future of the RMB as an
investment currency—100 each from companies
headquartered in China and outside it. Looking
beyond recent short-term volatility, the research
asks about perceived demand for international
usage of the RMB, what reforms are most urgently
required, and what steps global financial services
companies must take to prepare for a world in
which the RMB vies with the US dollar.
The EIU also conducted in-depth interviews with
a range of market participants and experts for this
report, globally and in China, including with senior
officials from the People’s Bank of China (PBOC),
China’s central bank.
Key findings of the research include:
A market-driven process—with
Chinese characteristics
China’s central bank says it remains committed to
opening the country’s markets and making the RMB
freely usable, but the process will require some
control:
l The PBOC underscores the need for control as
markets open and the RMB becomes an
investment currency.
“We remain committed to liberalising [China’s
markets], but might still need some control,”
says Yao Yudong, director general of the PBOC’s
Research Institute of Finance and Banking. “We
don’t really have a framework [for the

internationalisation of the RMB]. It’s really
driven by market forces... We are shifting from
RMB use in trade settlement toward other
assets, and the RMB is gradually being regarded
as a reserve currency, which depends more on
things like local interest rates and whether we
can give better returns for investors.”
l The PBOC says that the RMB is “not far from
convertibility”. But the steps needed to make
this a reality are major ones.
Senior officials from the central bank say
substantial progress in liberalisation is needed
in three key areas: opening up the channels of
individual cross-border investment, amending
regulations on foreign-exchange
administration, and facilities for foreign
investors entering domestic capital markets. “If
we achieve progress in all three areas then the
RMB may well fulfill the criteria for it to become
freely usable, or convertible,” says Tang Xinyu,
director of the PBOC’s Monetary Policy
Department II.
Despite recent events, the RMB’s
global status looks assured
The stock market crash, the aborted intervention to
prop it up and the RMB’s sudden devaluation
haven’t changed the currency’s long-term
trajectory:
l Most financial services executives still expect
a fully convertible RMB in around 5 years; full
maturity in 7-10
Around two-thirds (63%) of China respondents
to the EIU’s survey and three-quarters of those
offshore (78%) think that the RMB will become
fully convertible and tradable without
restrictions in around five years’ time.
Majorities of both groups believe it will take
only slightly longer (7-10 years) for the RMB to
become a global investment currency.
l Most Chinese firms (and many offshore) think
the RMB will overtake the US dollar
Sixty percent of China respondents believe the
RMB will surpass the US dollar as the world’s
most commonly used currency within the next
decade and 94% of say that this will happen
eventually. Global firms are more sceptical—
doubtless influenced by the events of the
summer—but one in five think the dollar’s
pre-eminence will be challenged within 10 years
and 45% think this will happen eventually.
l Global financial services firms still expect
international RMB business to soar
Currently only a minority (11%) of global
financial institutions earn more than 10% of
their revenues from RMB-related business, but
nine out of ten expect to hit this mark within
five years and a majority (57%) expect the RMB
to account for at least 20% of revenues within
the next decade.
l Global firms still see the potential in onshore
equities—but want full access before
committing
Perhaps surprisingly, global financial services
companies see onshore equities as one of the
fastest-growing international RMB business
area over the next three years. Yet a majority
(52%) also say they would be unwilling to grow
their business related to onshore equity markets
without complete liberalisation in this area,
suggesting many are unwilling to commit until
investment quotas and other controls are
eradicated.
Regulatory and legal reform will
be needed for full RMB maturity
If the RMB is going to become a global investment
currency, regulatory reform is urgently required:
l Restrictive regulations are the top barrier to
global RMB usage
Restrictive regulations are the most commonly
cited problem in handling the currency by both

on- and offshore financial services companies.
Across various asset classes and business lines,
substantial proportions of respondents say
either that they cannot grow their business
without further liberalisation, or that they are
reluctant to do so without clarification. This is
most acute for RMB-denominated debt and
alternative investments.
l The market should be left to work
Doubtless influenced by the events of the
summer, financial institutions in China put “less
government intervention in onshore equity
markets” at the top of their list of urgently
required policy reforms, while for global
respondents it is in second place. In both cases
it ranks above other laissez-faire policies often
cited as reform priorities, such as interest rate
liberalisation and a free floating exchange rate.
l Legal, technical issues also need addressing
The liberalisation of China’s legal services
market is the most common policy reform
sought by global respondents and is ranked
second by those in China, perhaps prompted by
worries about legal ownership of securities that
attended the approval this summer of Hong
Kong investment funds for sale in the mainland
(and vice-versa). In terms of supporting market
developments, global companies prioritise the
speedier rollout of common technical standards
such as the China International Payment System
(CIPS), which was set for launch as this report
went to press.
To succeed, financial services
companies need to drive the
process
The evolution of the RMB as a global investment
currency requires global financial firms’ active
participation. What do they need to do to succeed?
l Relationships with China’s authorities will
remain crucial
As long as the global adoption of the RMB
depends on policy decisions in Beijing it remains
crucial to keep good links to regulators and
authorities: improving such ties is the top
priority to increase their RMB business, global
respondents say. One way to do so is to be seen
actively promoting the RMB as an investment
currency: a bid to gain favourable positioning
with authorities is seen as one of the most
important drivers of RMB business for global
companies over the next three years.
l Global firms need to invest, innovate and
drive the market
Global financial companies recognise that a lack
of liquidity and offshore risk-management
products are key barriers to the global adoption
of RMB as an investment currency, ranking
second and third behind restrictive regulations.
Though policy reform will play a large role, firms
globally and in China recognise the onus is on
them to innovate and develop products to help
meet demand. Investing in building up their
own capabilities would also help: only
minorities of global firms have dedicated teams
focusing on RMB product development.
l Global RMB leaders are actively engaged in the
currency’s future
Financial services firms that already earn more
than 10% of their total revenues from cross-
border RMB related business tend to put a
greater emphasis than their less-advanced peers
on understanding global RMB demand, and in
interacting with clients to determine this. They
are more likely to have in-house research teams
monitoring the currency. They also agree more
strongly that the evolution of the currency
toward global investment status is an issue that
will partly decided by developments outside of
China’s control, seeing themselves as
participants, not bystanders, in that process.

About the research
In August 2015 The Economist Intelligence Unit
surveyed 202 senior executives from financial
services companies, of which 48% were C-level
executives and 52% heads of department or senior
managers. Of these, 102 were from institutions
headquartered in mainland China and 100 from
companies headquartered in international/
offshore financial centres (including the US and
UK, Singapore, Hong Kong, Taiwan, Canada,
Australia and India).
Companies surveyed in China had assets of at
least RMB50bn (US$7.8bn), while those in the rest
of the world had assets over US$50bn. All
companies surveyed had some involvement in
international RMB products and services, with
approximately equal proportions of banks,
securities firms, asset managers and asset owners
represented. Respondents worked in a range of
functions, including portfolio management, risk,
compliance, sales and marketing, and middle/back
offices.
Tom Leander was the author of this report and
David Line was the editor. Wu Chen, Duncan
Innes-Ker and Edel McCormack provided additional
research and reporting. The contents of this report
are the sole responsibility of the EIU and its
findings do not necessarily reflect the opinions of
the sponsor.
We would like to thank all the survey
respondents and interviewees for their time and
insights.
Interviewees, listed alphabetically by organisation:
Allen & Overy, Jane Jiang, Partner
Asian Development Bank, Jurgen Conrad, Head,
Economics Unit, Beijing
China Minsheng Bank Research Institute,
Huang Jianhui, Dean
Crédit Agricole CIB, Benjamin Lamberg, MD, Head
of Global Debt Markets, Asia
Darius Kowalczyk, Economist and strategist
ICBC, Zeng Qi, General Manager, Transaction
Banking
ICBC Credit Suisse Asset Management
(International), Richard Tang, Chief Executive
London Stock Exchange Group, Nikhil Rathi,
Director, International Development
Mandarin Capital Partners, Alberto Forcielli,
Founder
People’s Bank of China, Yao Yudong, Director
General, Research Institute of Finance and
Banking
Xie Huaizhu, Director, Research Institute of
Finance and Banking
Tang Xinyu, Director, Monetary Policy
Department II
Singapore Stock Exchange, Janice Kan, general
manager for Greater China

Though the RMB is now used across the world, close
control of its usage means it is not yet a global
investment currency. It will soon become one.
The stock market crash and subsequent events in
China over the summer of 2015 raised questions
about the opening of its markets and its
integration into the global financial system,
developments that for many years had seemed
inevitable. China’s central government appeared
wrong-footed by the volatility and power of the
market forces it had promised it would allow to play
a “decisive role” in economic policy.1
Where did
this leave its other policies designed gradually to
allow the greater flow of capital across its borders
and to promote the international use of its
currency, the renminbi (RMB)?
The RMB is already a global currency: it ranks
fourth globally by value of payments, according to
SWIFT, a financial communications network,
outranked only by the US dollar, the euro and the
British pound.2
But strict controls on its usage
mean it cannot yet be considered a global
investment currency in the same sense as the the
“big three”, or the yen. A global investment
currency must be freely convertible, and investors
and companies should be able to move it across
borders easily. It should be commonly used to price
securities and other assets that can be traded
1 As a communiqué issued after the landmark third plenum of the Chinese
Communist Party’s 18th Central Committee, in November 2013, put it.
2 As of August 2015. See http://www.swift.com/assets/swift_com/documents/
news/RMB_stellar_ascension.pdf
internationally. It should enjoy the full confidence
of international investors as a store of value and
unit of exchange. It should account for comparable
volumes of foreign exchange as these currencies
and, arguably, it should be used as an international
reserve currency.3
On many of these issues the RMB
is not there yet.
Driving and enabling usage
Meeting these criteria requires that there must be
sufficient drivers of demand for the usage of the
currency—in China and internationally—and an
environment that enables its adoption. Certainly
many of the demand drivers are evident, not least
because China is already the world’s largest trading
economy and its biggest exporter. Companies are
now emerging in China as global competitors,
investing overseas and looking to do so in RMB.
Likewise, companies outside the country now look
to increase their use of RMB to save in transaction
costs and seize opportunities in China. Investors
outside China want to invest in its companies and
those inside the country want greater access to
global markets.
From a policy standpoint the current
government has also made the rise of China’s
global economic influence a priority. President Xi
Jinping’s government has launched the Asia
Infrastructure Investment Bank (AIIB) as an
alternative to the World Bank and the International
3 This definition of a “global investment currency” was used in the survey and applies
throughout this paper.
Introduction:
Taking stock of reform1

Monetary Fund, and the “One Belt One Road”
initiative to support trade across Asia, the Middle
East and Africa. At the same time China is also
lobbying intensively for the IMF to include the RMB
in its reference basket for special drawing rights,
or SDR, a move that would bolster its use as a
reserve currency.
Nevertheless, the power of a global investment
currency redounds in the faith of its users. Their
confidence is supported by the credit standing of
the nation and more mundane elements, such as a
payment infrastructure, products and services
available in the denomination, and—crucially—
regulatory clarity. China’s advances in these
elements have been fast, but perhaps not as swift
as the hype suggests, nor as clear as global
investors would wish.
With this in mind, confidence in the RMB’s
progression toward internationalisation is perhaps
surprising. “Where does the confidence in the RMB
come from, if China hasn’t completed building the
infrastructure to guarantee the RMB as an
international currency?” asks Jurgen Conrad, head
of the economics unit at the Asian Development
Bank’s resident mission in Beijing. “Market players
have been paying close attention to the
development in the policy arena. Overall, in the
past few years, they’ve seen that policymaking is
moving towards more liberalisation.”
Those moves have been piecemeal. China’s tight
control of the economy has led to an historical
anomaly: a top-five currency that is traded onshore
(as CNY) and offshore (as CNH), but with
fundamental differences in how it can be used in
each place. The offshore market grows in vitality
and importance each year, yet is still vexed by
liquidity problems. The various policies regulators
have unveiled to facilitate cross-border capital
flows (QDII, QFII, RQFII, Stock Connect, Mutual
Recognition of funds, onshore free-trade zones
and so on) are confusing and have often made
financial services companies reluctant to invest in
growing their RMB business without further clarity.
Meanwhile, the “plumbing” that is needed to
ensure smooth global currency flows—and that is
taken for granted with the G4 currencies—is only
partially built. Foreign exchange trading is
conducted only in certain designated locations
offshore, with a limited number of clearing banks.
Development of an international payments system
has met with delays (though is expected to be
launched soon). Risk management products are
available, but only in basic forms, and restrictions
hobble the development of more complex
products.
To some degree this is a matter for China’s
policymakers to rectify. But it also depends on the
active participation of institutions meeting their
❛❛
Where does the
confidence in the
RMB come from, if
China hasn’t
completed
building the
infrastructure to
guarantee the
RMB as an
international
currency?
❜❜
Jurgen Conrad,
head of the economics unit,
Asian Development Bank,
Beijing
How long before the RMB becomes…
(% respondents; RoW = rest of the world)
Figure 1
0
10
20
30
40
50
60
70
80
RoWChinaRoWChinaRoWChinaRoWChinaRoWChinaRoWChina
6
15 14
63
25
16
78
19
4
8
52
41
5
74
17
4
9
34
0 0 06
24
5
55
3 67
4
3 3 1 0 0 01
Source EIU survey
Under 3 years Around 3 years Around 5 years Around 7-10 years Longer than 10 years
but it will happen
eventually
The RMB will never
reach this status
Fully convertible/tradable with no restrictions
A major global investment currency
The world’s most commonly used currency
(surpassing the US dollar)

clients’ needs. Richard Tang, chief executive of
ICBC Credit Suisse Asset Management, a money
manager, charges banks with not moving quickly
enough, or in a united way, to support the basics
that enable any currency to rise. “Instead of
talking about promoting it they should do more to
build the basics outside of China: basic
infrastructure, basic products and basic services.
Right now, that ecosystem is only just coming to
life.”
Fully convertible in five years
The timing of the fieldwork for the survey—
conducted in August 2015—turned out to be
apposite. The RMB’s progress can often be hyped,
but the stock market crash and concern over the
pace of reform presented an opportunity to gather
more measured responses. Despite the
circumstances, confidence in the currency still
abounds. A strong majority of respondents onshore
(63%) and offshore (78%) think that the RMB will
become fully convertible and tradable without
restrictions in around five years’ time (Figure 1).
Majorities of both onshore and offshore
respondents believe it will take longer (7-10 years)
for the RMB to become a global investment currency.
Onshore and offshore views diverge on the
long-term future of the currency, though. Sixty
percent of China respondents believe the RMB will
surpass the US dollar as the world’s most
commonly used currency in the next decade,
compared to just 21% globally. Some 94% of China
respondents say that the RMB will surpass the
dollar eventually; just 45% globally believe so.
Either way, its future as a global investment
currency seems still to be assured, even if other
responses to the survey raise questions about both
the drivers of this process and what steps will be
necessary—on the part of the authorities and
market participants—to make this happen.

“Expanding the currency’s use offshore
would be helpful,” senior central banker
says in exclusive interview
Yao Yudong, director general of the Research
Institute of Finance and Banking at the
People’s Bank of China (PBOC—the country’s
central bank) and other senior officials spoke
to the EIU in an exclusive, wide-ranging
interview for this report on October 1st , with
severe market volatility a recent memory.
In the wake of the stock market crash in
China, “We remain committed to liberalising
[China’s markets], but might still need
some control,” says Mr Yao. “Even the IMF
recognises the need for controls against
money laundering, and to guard against
extreme market movements.”
Regarding the sudden drop in the value of
the currency after an adjustment to its peg
in August, “The problem is the perception
that depreciation indicates troubles in the
domestic market,” Mr Yao says. Rather,
“China is transforming gradually, and
the message is about reform rather than
devaluation.”
In that light, Mr Yao characterises the
central bank’s approach to reform as more
responsive than planned.
“We don’t really have a framework [for the
internationalisation of the RMB]. It’s really
driven by market forces,” he says. “In the
first half of 2015, 26% of trade volumes were
settled in RMB. Six years ago it was about
1%. We are shifting from RMB use in trade
settlement toward other assets, and the
RMB is gradually being regarded as a reserve
currency, which depends more on things like
local interest rates and whether we can give
better returns for investors.”
Tang Xinyu, director of the PBOC’s
Monetary Policy Department II, sees the path
to full convertibility as a matter of progress
in three areas. However, since these cover
nothing less than moving money into and
money out of China, they are hardly minor
line items, but the foundation of the entire
reform agenda itself.
“Our assessment is that we are not far
away from full convertibility, if we achieve
progress in three key areas,” Ms Tang
says. “The first is opening up channels of
individual cross-border investment. At
present individuals, both resident and non-
resident, have limited channels to invest
each other’s market and are subject to some
ex-ante approval procedures, which is a
key area we are working on. The second is
amending regulations on foreign-exchange
administration, removing most of the ex-
ante procedures and establishing an effective
ex-post monitoring mechanism. The third is
more facilities for foreign investors entering
the domestic capital markets. If we achieve
progress in all three areas then the RMB may
well fulfill the criteria for it to become freely
usable, or convertible.”
Offshore participation is needed
Crucially, the central bank sees the market’s
participation offshore—where the PBOC has
no control—as important to liberalisation.
“Expanding the currency’s use offshore
would be helpful,” says Mr Yao, adding
that “the expansion of currency deposits
overseas would improve matters.” He admits,
however, that China’s high savings rate is an
obstacle for China to inject RMB into offshore
markets through the current account. “We
have facilitated firms to invest overseas, and
said that insurers can hold 15% of assets
overseas, but they often find foreign assets
too expensive.”
Stimulating private demand overseas
would be an outcome of the RMB’s inclusion
in the IMF’s basket of reference currencies for
its Special Drawing Rights (SDR). A decision
on whether to include the currency may come
as early as the final months of this year. Xie
Huaizhu, director of the PBOC’s Research
Institute of Finance and Banking, describes
this as “important”.
“At present the central banks of 47
countries use the renminbi as a reserve
currency,” she explains. “That would rise to
188 if the renminbi was included in the SDR
basket. We have facilitated central bank entry
into onshore markets, and greater central
bank holding of renminbi as reserve assets
would also stimulate private demand.”
On improving the technical trading
needs of companies and asset managers,
Ms Tang says the regulator relies on their
support and active participation, and that
policy is shaped only after consultation with
these stakeholders. This process, perhaps,
will be visible with the rollout of the China
International Payment System, or CIPS,
scheduled for October (as this report goes to
press). Ms Tang describes CIPS as a parallel
infrastructure alongside the existing onshore
CNAPS, aimed at improving the efficiency
of transactions of cross-border RMB flows
in terms of trading time, language, risk and
liquidity management. CIPS is based on the
internationally adopted ISO20022 code,
and will operate from 9am to 8pm Beijing
time, partly covering the Asian, Oceania and
European time zones.
Though the PBOC says it has no framework
for RMB internationalisation, it knows
definitively what it will not choose as a
model. “The US is not our example,” says Mr
Yao. “We draw more on the lessons from the
Japanese yen. China’s development stage
is now more like Japan’s, as the yen was
increasingly used during the 1970s and then
the systems were liberalised in the 1980s.
Japan also experienced a slowing economy
over this period, and into the 1990s. So we
would take the experience, as well as lessons
[from Japan].”
The PBOC speaks:
Not far away from convertibility… but not near, either

Financial services firms globally see swift growth
in their RMB business. Those in China are keen to
globalise but are conscious of greater domestic
competition as its markets open.
Growing RMB-related revenues
The global ecosystem for RMB products and
services is poised for growth, from a relatively low
base. International RMB products and services still
represent a relatively small proportion of offshore
financial institutions’ business, with just 11%
saying they account for more than 10% of total
revenues (Figure 2a). For China respondents,
international business in their home currency is
naturally more significant: 78% say more than 10%
of their revenues comes from international RMB
products and services (and 45% more than 20%—
Figure 2b).
Both offshore and onshore businesses expect
accelerating growth, despite concerns about the
pace and extent of reform and recent market
volatility. In three years, 42% of global financial
services businesses see more than 10% their
revenues coming from international RMB business,
and in five years 89% expect RMB-related revenues
at this level. Looking ahead ten years—by which
time they expect the RMB to be a global investment
currency on a par with the US dollar and euro—a
majority of global respondents (57%) think that
20% or more of their revenues will come from
international RMB products or services.
Demand drivers:
Undoubted potential2
What proportion of your company’s total revenues do you expect international RMB products and services to
account for…
(% international respondents)
Figure 2a
0
20
40
60
80
100
50%+41%-50%31%-40%21%-30%11%-20%0-10%
89
9 9 8 10
17
46
31
64
41
58
11 2 2 0 0 0 0 0 0 0 012
Source EIU survey
Now
In three years
In five years
In 10 years

This reflects strong growth in RMB usage and
capability among clients. Benjamin Lamberg,
managing director and head of Asia debt markets for
Crédit Agricole CIB, reports that three or four years
ago the RMB was seen as a currency to exit quickly.
Then, the prevailing opinion was “let’s hedge it as
fast as we can, let’s not stay exposed to this exotic
currency,” he says. “Or, equally, let’s get paid in euro
and US dollars, and avoid RMB altogether.” Now,
clients sing a different tune. “Now they are
comfortable to keep their exposure in USD, euro,
yen—but also RMB. And if they need a swap they call
us right away. And they’re pushing us to offer them
more sophisticated cross-border solutions in RMB.”
Responses from onshore institutions reflect an
already robust global business in RMB and its
status as an international currency despite
remaining capital controls. Currently, 45% say
more than 20% of their revenues are from
international business. And expectations of growth
in international revenues are equally bullish. Some
73% of onshore respondents expect international
RMB products and services to account for more
than 20% of their revenues in three years. In five
years, the proportion climbs to 88%. About
one-third (32%) of China respondents forecast that
international RMB business will be 50% or more of
their revenues in five years.
A drive to globalise plays a part. Onshore
institutions are gearing up to become international
players, responding to the rapid development of
offshore RMB trading centres, which abets growth
in offshore transaction volumes and can attract
greater participation by Chinese companies
expanding overseas into developed markets.
In the view of Zeng Qi, general manager for
global transaction banking at ICBC, the two trends
support a virtuous circle, leading to higher RMB
transaction volumes. “For ICBC, we’ve seen
increased usage of RMB since ICBC became the
settlement bank of RMB and local currency in local
markets,” she says. “The more foreign firms deal
with Chinese firms, the more usage there is of RMB.
Some have chosen RMB as a trade settlement
currency, because of cheaper transaction costs.”
Instead of local currency being converted to US
dollars and then to RMB, “now many currencies can
be traded directly with RMB.”
Focusing on core competencies
What kinds of international RMB business will see
the strongest growth? Onshore respondents pick
capital raising products and services as the fastest-
growing business area over the next three years,
while it ranks second-to-last among those offshore.
Global respondents are marginally more bullish than
their peers in China about prospects for M&A
advisory, onshore equites and equity derivatives
(despite the events of this summer), and forex
(Figures 3).
What proportion of your company’s total revenues do you expect international RMB products and services to
account for…
(% China respondents)
Figure 2b
0
5
10
15
20
25
30
35
50%+41%-50%31%-40%21%-30%11%-20%0-10%
22
33
26
22
29
26
2019
12
0
8
0 0
22
10
3
10
8
11
19
32
35
16
18
Source EIU survey
Now
In three years
In five years
In 10 years
❛❛
The more foreign
firms deal with
Chinese firms, the
more usage there
is of RMB.
❜❜
Zeng Qi,
general manager for global
transaction banking, ICBC

This reflects the respective competencies of the
institutions themselves. Onshore firms have
longstanding relationships with expanding Chinese
companies and have likely participated in major
capital raisings as these companies have grown.
They now expect to support these firms’ global
ambitions. Offshore institutions, meanwhile, have
built expertise in cross-border M&A advisory—a
lucrative business that allows for access to
underwriting equity and debt issuances associated
with deals—and are vying to bring this competency
to cross-border RMB transactions. Foreign
exchange specialists in offshore centres, most
notably London and Singapore, also see strong
potential to grow RMB business. Since forex
underpins all international currency usage,
forecasting growth here is understandable.
Despite recent volatility, offshore players clearly
see onshore equities in general as a still attractive
growth area, running contrary to the general belief
that they were shaken by the summer market
turmoil. Nearly one-third (29%) expects growth in
business related to this sector over the next three
years, making it the second-hottest prospect
(along with forex).
The optimism is bolstered by improved market
access. FTSE Russell, a compiler of indices, included
China A Shares in two new transitional emerging
markets indices in May 2015, saying it had made
the decision following increases in RQFII
allocations and improvements in the RQFII
application process. Although MSCI, another index
provider, deferred a decision the same month to
include RMB-denominated stocks in its
benchmarks, it said it eventually intends to do so
after settling such obstacles as ease of access and
investment quotas with regulators.
MSCI estimated that including A shares in the
benchmark would have injected about US$400bn in
funds from asset managers, pension funds and
insurers into mainland equity markets. When that
move does come, it will represent a significant
milestone in the growth of RMB investment.
What’s driving demand?
Views of the top drivers of growth reflect the
ambitions of the respective cohorts in the survey,
as well as their awareness of the political context in
China. Onshore institutions are most likely to name
a growing base of international clients seeking to
invest in China as a key reason for the expansion of
international RMB business over the next three
years (cited by 45%). Growing demand for risk
mitigation products and services related to
international investing in RMB is also important
(Figure 4a/i), a natural reflection of expanded
Fastest-growing international RMB business areas over next three years
(% respondents selecting in top three)
Figure 3
0
5
10
15
20
25
30
35
30
18
20
25 25 25 25 24 25
31
27
22
20
28
23 23
26
25
2323
18 17
28
2929
Source EIU survey
China
Rest of the World
M&A advisory Forex Onshore
equities and
their derivatives
in general
Wholesale
lending
Offshore
equities and
their derivatives
in general
Corporate
finance (cash
management/
transaction
banking)
Offshore
institutional
asset
management
services
Offshore retail
asset
management/
wealth
management
services
Risk
management
services
Offshore
bonds/fixed
income
products and
their derivatives
in general
Capital raising
products/
services
Onshore
bonds/fixed
income
products and
their derivatives
in general

hedging needs as this base grows.
Both responses suggest that global companies
are increasingly turning to Chinese institutions for
their expertise in handling RMB cross-border
business. But there is a recognition that this
advantage will not necessarily endure as China’s
markets open: in the longer term, China’s financial
services companies recognise the increasing
importance of building capacity to stay competitive
(Figure 4a/ii). China’s financial services companies
also foresee that servicing Chinese clients going
overseas will also become a higher priority.
A key short-term driver for both onshore and
offshore institutions reflects the impact of doing
business in largely controlled economy. More than
one-third of the onshore respondents (38%) say
gaining a favourable position with authorities
ahead of further liberalisation will continue to be
an important driver of growth in their business,
and a similar proportion (36%) also name winning
government-linked business. But this is not a
factor they expect to persist in the longer term.
Rest-of-the-world respondents seem even more
acutely aware of the political milieu, with 47%
saying that gaining favourable positioning with
authorities ahead of further liberalisation is a top
driver of their China business (a view that persists
when taking the longer view, with the top four
growth drivers unchanged—Figures 4b/i and 4b/
ii). The figure reflects the apparent view in offshore
institutions that it will be necessary to show fidelity
to the government’s goal of internationalising the
currency to secure expanding RMB business, and
suggests that international players see themselves
as beneficiaries of liberalisation only if they are
viewed by regulators as participants in the process.
Top five drivers of growth in next three years—China
(% China respondents selecting in top five)
Figure 4a/i
Source EIU survey
Growing client base of non-China multinationals
seeking to improve/optimise their RMB capability
To gain favourable positioning with authorities
ahead of further liberalisation
Growing demand for of risk mitigation products/
services related to international investing in RMB
Growing base of international clients seeking to
invest in China
To win government-linked business
45%
40%
38%
36%
36%
Top five drivers of growth in longer term—China
(% China respondents selecting in top five)
Figure 4a/ii
Source EIU survey
Continued growth of business in existing offshore
forex trading centres
Growing base of Chinese clients seeking to
invest overseas
Growing demand for of risk mitigation products/
services related to international investing in RMB
To build capacity to stay competitive (as
competitors expand their capabilities in these areas)
Growing base of international clients seeking
to invest in China
33%
31%
31%
30%
28%

However, market drivers are equally important
to the offshore institutions, with about half (47%)
naming continued growth in business in existing
offshore forex trading centres as an underlying
catalyst to grow RMB business, while 44% say that
increased pools of offshore RMB and increased
offshore liquidity in general is driving transaction
growth.
Top five drivers of growth in next three years—RoW
(% international respondents selecting in top five)
Figure 4b/i
Source EIU survey
Increase in offshore RMB bond market
underwriting business
invest in China
Increased pools of RMB offshore/increased
offshore liquidity in general
47%
47%
46%
45%
44%
Top five drivers of growth in longer term—RoW
(% international respondents selecting in top five)
Figure 4b/ii
Source EIU survey
Increase in offshore RMB bond market
underwriting business
invest in China
Development of new business in new offshore forex
trading centres
49%
46%
46%
45%
41%

Regulations are the biggest barrier to the growth
of global RMB business, with many financial
services firms reluctant to invest until
liberalisation proceeds. Liquidity and a lack of
risk management products also pose problems.
Despite its rapid rise, the fact remains that when it
comes to using the RMB across borders, much of
the established infrastructure that is taken for
granted when transacting in a G4 currency—such
as common technical standards, risk management
instruments, counterparty experience and,
crucially, clear rules—doesn’t yet exist. In its place
is a patchwork, stitched together as the fabric
grows and as regulations permit.
Regulatory roadblocks
The two groups surveyed in this report cite
restrictive regulations as the top problem they face
in handling the currency, with a majority (58%) of
international respondents citing this reason, and a
near-majority (46%) in China saying likewise
(Figure 5). This is despite frequently publicised
reforms to cross-border handling of the currency—
such as easing of controls over repatriation of RMB
funds raised offshore, the advent of cross-border
cash pooling, intercompany lending across borders
in RMB and so on—and some high-profile steps to
broaden the access of offshore investors to Chinese
assets and vice-versa, such as Shanghai-Hong
Enabling adoption:
Perceived problems3
Top problems in growing international RMB business
Figure 5
0
10
20
30
40
50
60
58
46
35 35 36 36 36 36 36
40
31
28
35 35 34 3432 3233
27 27
39
47
51
Source EIU survey
China
Rest of the World
Restrictive
regulations
Lack of liquidity
in relevant
markets
Lack of relevant
risk-
management
products/
services
offshore
Poor
communication
with
counterparties
Reduction in
arbitrage
opportunities
between
offshore and
onshore
interest rates
Speed of change
of rules and
regulations
Lack of common
technical
standards
governing
trades
Lack of internal
experience with
international
RMB
transactions,
products or
services
Lack of relevant
risk-
management
products/servic
es onshore
Lack of clarity
on rules and
regulations
Lack of
counterparty
experience with
international
RMB
transactions,
products or
services
High failure rate
of trades/
transactions, or
higher
transaction
costs in general

Kong Stock Connect, mutual recognition of
investment funds between Hong Kong and the
mainland, and widening cross-border investment
quotas.
The lack of clarity in regulations has a direct
impact on the willingness of financial services
firms—both globally and in China—to invest to
grow their businesses (and thereby support the
internationalisation of the currency). A substantial
proportion of businesses are likely to say either
that they cannot grow their business without
further liberalisation, or that they are reluctant to
do so without further clarification on practice and
regulation. Significant minorities are unwilling to
invest further without complete liberalisation
(Figure 6).
Often, how restrictions are eased becomes an
issue. When a new measure is introduced by
regulators, it is published by the relevant authority
and left to market participants to grasp how the
rules should be interpreted. “It is difficult to stay
up to date; it requires a good amount of time and
effort,” says Mr Lamberg of Crédit Agricole. “There
are new regulations and texts published by the
People’s Bank of China or the China Securities
Regulatory Commission on a very regular basis.
And then there is an interpretation of this new set
of rules, and we need to see how it’s being applied.
Every time there is a change in securities law,
traders in charge of an asset class will reach out to
his or her contacts in the market, offshore and
onshore, to see how we implement it.”
In some cases the market is just too new. A large
majority (85%) of offshore respondents say they
can’t grow their businesses in the Panda bond
market without further liberalisation. Almost half
(46%) of onshore institutions feel the same way.
The market has barely started, with issuances
mainly by policy banks and multilateral institutions.
However, the PBOC has announced plans to boost
participation in the near future, and two foreign
commercial banks—Bank of China (Hong Kong) and
HSBC—issued panda bonds on the same day in
September 2015. So far German carmaker Daimler
has been the only pioneer among corporates, with
issuances in March 2014 and April 2015.
Offshore RMB bonds bring a similar response.
Some 70% of rest-of-the-world respondents say
they are be reluctant to invest in growing their
business in dim sum bonds without further
clarification. A mere 13% say regulations are clear
and have allowed them to grow. In China, just 20%
say regulations are clear, while 36% say they need
more clarification.
How do regulations in China on cross-border investment in the following areas affect your business?
Selected assets
(% respondents)
Figure 6a
0
20
40
60
80
100
85
46
1213
23
26
20
12
16 14
21 23
12
21
8
17
4
36
17
8
19
30
22
52
29
19
2828
15
25
28
13
32
43
12
25
33
16
40
36
13
38
28
18
27
50
18
37
31
70
5
26
5
12
12
Source EIU survey
RMB debt onshore
(e.g. Panda bonds)
RMB debt offshore
(e.g. dim sum bonds)
RoW China RoW China RoW China RoW China RoW China RoW China RoW China
RMB equity onshore RMB equity offshore RMB alternative
investments (hedge
funds, structured
products etc) onshore
RMB alternative
investments offshore
Foreign exchange
We cannot grow our business until there is
further liberalisation in this area
They are clear and have enabled us to grow our business
We would be reluctant to invest to grow our business until there is
further clarification on practice and regulation in this area
We would invest to grow our business only with complete
liberalisation in this area
2 23 13 20 12 16 14 21 4 23 12 21 8 17
❛❛
It is difficult to
stay up to date; it
requires a good
amount of time
and effort. There
are new
regulations and
texts published by
the People’s Bank
of China or the
China Securities
Regulatory
Commission on a
very regular basis.
❜❜
Benjamin Lamberg,
managing director & head of
Asia debt markets, Crédit
Agricole CIB

The hesitancy about RMB debt is doubtless
coloured by recent market conditions. Foreign
issuers long stayed out of the Panda market
because raising funds offshore in the dim sum
market was cheaper. More recently, the rally in
A-shares in the first half of 2015 weakened the
appeal of the dim sum market.
Market volatility at the time the survey was
conducted probably influenced responses
concerning onshore RMB equities, too. A majority
(52%) of non-China respondents say they would be
unwilling to grow their business in this area
without complete liberalisation, suggesting that
many international institutions are unwilling to
commit until investment quotas are eradicated.
This response jibes with MSCI’s deferring its
decision on whether to include China’s A shares in
its emerging markets benchmark index. Though
MSCI tried to put a positive spin on its deferral, it
cited concerns over the pace of capital market
reforms and investor worries about accessibility
and capital mobility. Nevertheless, as Figure 3b
above shows, global firms expect growth in
business related to onshore equities in the near
future, suggesting they agree with MSCI’s
confidence that such issues will be resolved soon.
Regarding foreign exchange, a significant
proportion of both constituents in the survey (40%
offshore; 38% onshore) say they are reluctant to
invest in without the further clarification of
regulations, a result that suggests the impact of
reforms in offshore trading centres is being
compromised due to lack of clarity.
Liquidity and other concerns
Current market noise also plays into concerns over
lack of liquidity offshore. A majority of global firms
(51%) name lack of RMB liquidity as a problem, a
reflection of the liquidity crunch in the major
offshore trading centres during the August market
collapse in China. In Hong Kong in particular,
cracks showed in the regulatory mechanism to
support RMB liquidity when, for a time, the
seven-day offshore RMB interbank offered rate
spiked to 10.95%. An offshore liquidity crunch
emerged in Singapore, as well.
Janice Kan, general manager for Greater China
at the Singapore Exchange (SGX), as well as head
of market development and strategy for
derivatives, believes that the liquidity squeeze in
offshore markets was more a reflection of the lack
of risk management options open to investors than
a failure of liquidity measures established by
regulators.
How do regulations in China on cross-border investment in the following areas affect your business?
Selected business areas
(% respondents)
Figure 6b
0
10
20
30
40
50
40
14
9
26
7
22
3
23
2
16
36
28
8
32
40
21
32
42
13
19
42
18
36
33
9
31 31
18
48
33
5
36
Source EIU survey
Retail asset
management
RoW China RoW China RoW China RoW China
Institutional asset
management
Cash/treasury
management
M&A
They are clear and have enabled us to grow our business
We cannot grow our business until there is further liberalisation in this area
We would be reluctant to invest to grow our business until there is
further clarification on practice and regulation in this area
We would invest to grow our business only with complete liberalisation in this area
❛❛
There are
currently not
enough
instruments and
facilities to allow
offshore
investors’ risk
management
needs to be met.
When there is
market
dislocation, there
are limited tools
they can turn to.
❜❜
Janice Kan,
general manager for Greater
China, SGX

“There are currently not enough instruments and
facilities to allow offshore investors’ risk
management needs to be met,” Ms Kan says. “When
there is market dislocation, there are limited tools
they can turn to.” She gives the example of the
devaluation of the Japanese yen in recent years.
“Nobody is complaining of a liquidity crunch,
because the risk management tools are there.”
Global respondents are well aware of the risk
management issue, with 47% listing lack of relevant
risk-management products and services offshore as
a problem. Ms Kan, who has introduced five RMB
futures contracts at SGX, believes the pace of
development can be quicker. The slow unwinding of
regulatory restrictions covering derivatives onshore
limits the ability to create more sophisticated risk
management tools. Even publicised advances—such
as a series of options trades executed by Deutsche
Bank for Mengniu Dairy, a China-based food
supplier, immediately following the easing of a
derivatives trading restrictions in August 2014—
were a relatively small advance on “plain vanilla”
options already available.4
The lack of able counterparties in all
transactions, including derivatives, is also cited as
a problem by more than one-third of China-
headquartered institutions, a reflection of the
familiar complaint that foreign companies lack
experience with international RMB transactions,
products or services. This reflects their home
currency advantage, in the view of ICBC’s Ms Zeng.
“Chinese firms have the financing, excess capacity
and technology advantage, [which] complements
local needs,” she says.
But there’s a flipside. Like a partner in a marital
spat, many offshore respondents (39%) complain
of poor communication with counterparties in this
business, compared to just 21% in China.
4 http://www.allenovery.com/SiteCollectionDocuments/RMB%20report-case%20
studies-email.pdf, P43

Legal reforms are seen as the biggest enabler of
the RMB as a global investment currency, along
with CIPS, while on- and offshore firms want less
government intervention in China’s markets.
From the point of view of the financial institutions
that will help drive global usage of the RMB as an
investment currency, the obstacles to its adoption
stand in plain sight. What policy measures and
market developments do they think are most
urgent to resolve them?
The need for legal clarity
The number-one policy reform global respondents
think is likely to drive adoption of the RMB as an
investment currency (and the second most
important for those in China) is liberalisation of
the legal services market and judicial reform.
Separately, those in China see improved clarity
over the legal infrastructure related to mainland
securities as the most important market
development—while for global respondents this is
second (Figure 7).
The paramount importance of legal clarity and
Enabling adoption:
Sought-after solutions4
Policy steps needed to accelerate global adoption of RMB as an investment currency
Figure 7a
0
5
10
15
20
25
30
35
28
32
31
28
25
27
23
27
25
26
28
26
24 25
23 23 24
22
25
22
21 21
24
21
Source EIU survey
Further
liberalisation of
the legal
services
market/judicial
reform
Less government
intervention in
onshore equity
markets
Privatisation of
the banking
sector
Removal of
quotas for
cross-border
investment
schemes
Accelerated pace
of interest rate
liberalisation
Lifting of
restrictions on
foreign
investment in
China’s financial
services sector
Introduction of
additional
onshore free
trade zones
A free floating
exchange rate
Allowing greater
international
access to
domestic
corporate bonds
Greater central
bank
independence
Reforms to local
government and
SOE financing
Relaxation of
rules on
domestic bank
lending overseas
28
31
25
23
25
28
24
23
24
25
21
24
China
Rest of the World

certainty when it comes to opening China’s capital
markets should be no surprise. Investors want to
be sure their claims are recognised and their
contracts enforceable. This became a point of
contention after Hong Kong-Shanghai Stock
Connect was launched in November 2014, given
uncertainty over the ownership of securities held
through a nominee. It was unclear whether Chinese
law recognised the concept of beneficial
ownership—in which a person enjoys the benefits
of ownership even though the legal title is under
another party’s name—or how disputes over such
ownership might be enforced.
In the event the issue was resolved after the
fact. Regulations established under the QFII and
RQFII programmes allow for nominee holders of
securities, language that was written into the Stock
Connect regulations as well (in which the Hong
Kong Securities Clearing Company is the nominee
owner). The China Securities Regulatory
Commission issued a clarification in May 2015
confirming the validity of the arrangement, and
specialists in the area conclude that the rights of
enforcement under Stock Connect are at least as
robust as those under the QFII and RQFII schemes.
However, concerns are still evident. Attendees
at an Economist conference on corporate
governance in September 2015—all senior
executives from major multinationals—were polled
on whether they felt confident they could pursue
their legal claims on the mainland. Not a single
attendee said yes.5
Anecdotal evidence suggests that the
government’s response to the market chaos in the
summer has added to confusion within the country,
as well as internationally, about China’s
commitment to strengthening the rule of law and
making its application more transparent.
Jane Jiang, China regulatory partner in Beijing
for law firm Allen & Overy, says that in the wake of
the government’s response to this summer’s
volatility, even local institutions started to feel
uncomfortable with the uncertainty in the legal
and regulatory environment and seemed to have
lost their bearing.
“In the past, it was common to for foreign-based
clients to seek clarification on regulatory
uncertainty. Now concern has been equally intense
from inside China.” Ms Jiang suggests that the
government’s actions have pitched local players
onto unfamiliar ground. Before this summer they
felt confident in support garnered from long-term
relationships with regulators and their familiarity
with the rules of the game. Clarification was a
5 “Boardroom risk in a changing economic climate—Executive Summary”; The
Economist Events, September 2nd 2015
Market developments needed to accelerate global adoption of RMB as an investment currency
Figure 7b
0
10
20
30
40
50
18
27
33
41
39
35
25
35 35
32
28 30
26
29
22
27
33
24
28
21
28
20
Source EIU survey
Rollout of unifying
technical standards
for international
RMB transactions
Improved clarity of
legal infrastructure
related to mainland
securities
Improved research
from credit rating
agencies of
onshore debt
Inclusion of RMB in
IMF Special
Drawing Rights
reference currency
basket
Greater
international
pricing of
commodities in
RMB
Improvement of
company
transparency in
onshore financial
markets
More RMB swap
lines
Inclusion of China
A Shares in
emerging market
indices (eg MSCI)
Wider distribution
of international
RMB pools
More offshore RMB
clearing centres
33
39
25
35
28
26
22
33
28
28
China
Rest of the World

matter of turning to familiar contacts within the
regulatory system. But the assurance bred from
this familiarity is now in doubt, at least
temporarily.
Beyond legal clarity, foreign institutions would
see greater transparency in China’s murky
corporate bond market as salutary, picking
improved research from credit rating agencies of
onshore debt as a top-three market development
that would speed the RMB’s global use. China’s
bond market is about the third-largest in the
world, at about US$4.24trn. But without the guide
of better research, the size and diversity of the
market presents daunting obstacles, making it
tough for investors to become familiar with the full
range of bonds available to them, Goldman Sachs
Asset Management noted in a recent report.6
Let the market work
Both offshore and onshore institutions are also
looking for less meddling in markets. Financial
institutions in China put “less government
intervention in onshore equity markets” at the top
of their list of policy reforms that would have the
biggest impact, while for global respondents it is in
second place—although not by a significant
margin. In both cases it is above other laissez-faire
policies often cited as reform priorities such as
interest rate liberalisation and a free floating
exchange rate.
To be sure, the noise of the stock market
collapse at the time of the research plays into the
response. The reaction signals concerns over the
government’s response to the crisis: intervening
directly by buying shares through state-owned
companies to stabilise prices, pressuring short-
sellers and clamping down on securities firms
accused of market manipulation. The measures
seemed to signal the state’s ambivalence toward
allowing market forces to play a greater role—
although officials have been at pains to point out
since that there is no change to this policy.
From the international point of view, the need
to let demand and supply dictate matters extends
6 http://www.goldmansachs.com/gsam/glm/insights/market-insights/
china-bond-market/china-bond-market.pdf
to dissatisfaction with the quota system for
cross-border investment schemes. MSCI’s deferral
of its decision whether to include RMB-
denominated shares in its benchmark indexes was
partly due to this dissatisfaction. China has moved
to expand access under the quota scheme
incrementally, conscious of the implications of
allowing the freer flow of capital across its borders.
In the latest development, regulators expanded
the UK’s RQFII quota in September, saying it did so
based on market demand.
Institutional investors are aware that a phase-
out of the system would have to handled gradually.
“The quota system cannot be scrapped now,
because of the pressure on capital flight is huge,”
says Alberto Forcielli, the founder of Mandarin
Capital Partners, a private equity fund, who is a
notable China bear. “In theory it should be
scrapped. [But] it may take many years, and we
have no reason to believe it will be scrapped.”
Respondents in China are less concerned with
ending quotas than with allowing the market to
function within China’s financial services sector by
lifting restrictions on foreign investment. This
suggests recognition that new ideas and wider
competition are needed to force reform among
China’s indebted banks, as well as resolve issues in
the “shadow banking” system.
Market participants in China are vocal in calling
for reform. “We should put banking reform as a top
priority,” says Huang Jianhui, Beijing-based dean
of the research institution of China Minsheng
Banking Corporation. “We should encourage
Chinese banks to go global.” He also advocates a
larger international role specifically for non-state-
owned joint-stock institutions such as China
Minsheng or China Merchants Bank, suggesting
that private ownership would allow for speedier
acceptance of reform and international practices
than the cumbersome state giants. Foreign
respondents to the survey agree, picking banking-
sector privatisation as the joint-third-most-
important reform priority.
❛❛
We should put
banking reform as
a top priority. We
should encourage
Chinese banks to
go global.
❜❜
Huang Jianhui,
dean, China Minsheng
Banking Corporation
Research Institute

Practicality and prestige
In general, respondents’ concerns largely reflect
the importance of establishing mechanisms to allow
the practical day-to-day usage of the currency.
Speedier rollout of common technical standards is
named as the most crucial market development by
offshore respondents. China is only now preparing
for a launch of the China International Payment
System (CIPS), a messaging system that will allow
the direct clearing of RMB transactions between
counterparties across China’s borders (something
currently possible only through a limited number of
official clearing banks, in designated locations).
The launch has been delayed several times; the
PBOC confirmed that stage one was set to begin as
this report went to press.
“This is one of the most important initiatives the
PBOC has planned,” says Ms Kan of the SGX. “There
is principal risk when one currency is exchanged
against another and, to mitigate that, many
currencies are settled through global solutions such
as continuous linked settlement,” or CLS. She
suggests that RMB “can also benefit from being part
of the CLS network, which is a mainstream solution
already supported by a network of global banks.”
China respondents also give practical steps a
high priority but have one eye on prestige, naming
the RMB’s inclusion in the IMF Special Drawing
Rights basket as a top-three market development
that would speed the RMB’s progress. A decision on
this—due at the time of writing—has been keenly
awaited all year. Offshore respondents put this
reform in the middle of the pack. It would have
symbolic impact, but also a practical effect in
increased RMB forex flows.
Darius Kowalcyzk, senior economist and
strategist at Crédit Agricole CIB, notes that a
decision to include RMB into the SDR basket with a
10% weighting (the current weightings for the
Japanese yen and the British pound) means that
central banks would have to add about US$500bn
to meet reserve requirements. Given offshore and
onshore RMB forex markets have daily trading
volumes of around US$120bn and US$60bn, the
influx would be easily absorbed—though would be
“supportive” to the stability of the currency.

Financial services institutions claim investment
in RMB competence is a high priority, but are
they following through?
Statements made about the RMB’s rise often reveal
a disparity. On the one hand it is headed for global
investment status, perhaps even dominance over
the US dollar. On the other, it lacks liquidity and
available hedging instruments, and the regulatory
underpinnings that support its growth are
restrictive and unclear. That leaves players in RMB
markets with a delicate strategic decision. Invest
now, or wait? Approach gradually, or dive in?
Reluctant to commit
Mr Tang of ICBC Credit Suisse Asset Management,
who worked as a commercial banker in the US
before returning to China and joining ICBC, says
global financial institutions pay lip service to the
currency’s importance, but still treat it like a
second-class currency.
“If you look across the board for all transaction
banking infrastructure in RMB, investment has
been minimal,” he says. “Banks will tell you that in
the last ten years, ‘We’ve shifted our focus from
interest to fee income and we’re building up our
transaction banking operations, beefing up our
teams in RMB.’ But what they’re doing is expanding
their sales teams, not the platforms, not the
infrastructure. When was the last time they
invested in a major upgrade of their transaction
banking infrastructure?”
Banks argue otherwise, and will point to RMB
competencies backed by the creation of new posts
to oversee and consolidate all RMB transaction
business. To take three examples, BNP Paribas has
a head of RMB competency, HSBC has anointed a
global head of RMB internationalisation, while
Deutsche Bank has a global head of RMB services.
However, the survey responses do at least partly
support the view that financial services businesses
are reluctant to build RMB teams in the current
environment. Only 38% of offshore respondents
(versus 46% onshore) report having a research
team that monitors RMB internationalisation and
publishes reports and analysis. Only 34% offshore
(45% onshore) report having a desk that
specialises in structuring cross-border/
international RMB risk management products. The
China institutions show a thin majority in some
areas, but in general are seem understaffed given
the expectations for global growth, while none of
the offshore players are in the majority for any of
these crucial capabilities. For them, the majority
view seems to be “wait and see”.
Preparing for a global RMB
5

It’s still about the guanxi
To be sure, there is rarely a first mover advantage
in banking. All the cost is up front. Even in the
structuring of new derivatives products in China,
bankers talk of a the long learning curve for those
responsible for authorizing their use in state-
owned companies, involving expensive bankers’
face time with senior management and visits to
regulators to understand the boundaries of the
endeavour.
This is the underlying reason that the rest-of-
the-world respondents name improving
connections or relationships with mainland
regulators and authorities as the most urgent
priority for financial services companies to
increase international RMB business, picked by
41% (compared to 28% for onshore institutions;
Figure 9).
Such is the power of the People’s Bank of China,
caretaker of the growth and stability of the world’s
second largest economy, with access to US$3.5trn
in currency reserves, that an entire industry of
research has bloomed to interpret the choices open
to the central bank. This plays out in a practical
level for financial services companies deciding how
and where to grow their business. Mr Kowalcyzk of
Crédit Agricole says that it would be distinct
advantage for him to understand the PBOC’s
tolerance for volatility in the RMB, for instance:
without that knowledge it is difficult to know when
to move up the value chain to more sophisticated
RMB options, which could be a lucrative business
for the bank.
Global companies also apparently look to
onshore institutions to help grow in their cross-
border RMB business, picked by 37% as an urgent
priority. This reflects the view of offshore
Does your business have…
(% respondents)
Figure 8
Source EIU survey
An in-house team tracking
cross-border/international
RMB-related regulatory
developments
A specialist or specialists to liaise with
clients to inform them on cross-border/
international RMB developments
A compliance officer or banker
in contact with Chinese
regulatory authorities to keep
abreast of current regulatory
developments
A research team that monitors
RMB internationalisation and
publishes reports and analysis
Product development teams
that focus on RMB products
tailored to regulatory changes
A team that focuses on or
specialises in RMB clearing
services
A team dedicated to
assessing client demand
for and knowledge of
international RMB
products and investment
services
Officials/a team that meets
with regulators to explain/
educate regarding risk
management tools that can be
adopted for RMB, and to
encourage further easing of
regulations
A desk that specialises in structuring
cross-border/international RMB risk
management products
40
China
Rest of the world
10
20
30
50
60
38
44
46
53
45
49
44
41
53
47
38
44
38
42
34
45
49
38

executives that their onshore colleagues are better
placed to understand regulatory moves, and also
that onshore institutions necessarily invest more
in RMB business, because they live and breathe it.
An overseas opportunity
Another factor may be in play: with Chinese
companies going overseas and major government
initiatives such as “One Belt, One Road” (OBOR) in
the early stages, partnering with major Chinese
financial institutions that will be a major source of
financing these drives could offer some access to
the business associated with them. “We can see in
the future of One Belt One Road that RMB
dominated investment and settlement will become
a key element,” says Ms Zeng of ICBC. Offshore
institutions want a piece of that, too.
The priorities named by China institutions all
reflect an urge to become more competitive in
international markets. The most commonly
selected move is marketing their global RMB
competence outside China, showing an obvious
desire to raise brand profiles. The response reflects
an increasing focus on the “going out” strategy, in
line with Chinese companies expanding overseas
and government initiatives like the Asian
Infrastructure Investment Bank and the Maritime
Silk Road, as well as OBOR.
Perhaps most interesting, 30% of the onshore
respondents say they see an urgent need to invest
more in marketing their global RMB competence
within China, grasping that they have the ability to
take advantage of their position to capture
companies expanding from China and at once
become more competitive offshore. China
institutions understand their own strength.
The front line of RMB innovation
The ability of financial services companies to
innovate in RMB products and services will
distinguish winners from losers as the RMB
becomes a global investment currency. China and
global firms award investment in RMB product
development a relatively high priority.
Perhaps the front line of innovation lies in the
offshore trading centres. The Singapore and
London exchanges pay more than lip service in
developing, and encouraging others to develop,
new products in the currency.
Nikhil Rathi, director of international
development of the London Stock Exchange Group,
sees its position as “privileged.” “We are able to
see RMB internationalisation taking place across
asset classes, markets and customer types,” he
says. The LSEG lists 35 RMB bonds on its markets,
including the listing last year of the first RMB-
What financial services companies need to do most urgently to increase their international RMB business
Figure 9
0
10
20
30
40
50
18
27
30
41
28
37
31
34
29
33
26
29 28 27
39
27
25 26
29
26
30
21
Source EIU survey
Improve their
connections/
relationships with
mainland
regulators/
authorities
Improve their
connections/
relationships with
major Chinese banks
Reallocate resources
towards
international RMB
services
Focus on product
development
Invest more in staff
training on
international RMB
products/ services
and markets
Create more
channels for RMB
liquidity/access to
liquidity for
international clients
Invest more in
marketing their
global RMB
competence outside
China
Apply for/secure
quotas for
cross-border
investment schemes
as soon as they are
announced
Invest in
communications
technology that is
compatible with
cross-border
standards
Invest more in
marketing their
global RMB
competence within
China
30
28
31
29
26
28
39
25
29
30
China
Rest of the World

denominated green bond, issued by the
International Finance Corporation. The group’s
LCH.Clearnet, a global clearing system, is the first
such institution to clear RMB-denominated
exchange-traded funds in Europe and in 2012 it
cleared the first CNY non-deliverable forward. Mr
Rathi says that CNY is now the second largest
currency pair, accounting for almost 25% of all
cleared NDFs.
Arguably, the Singapore exchange has been
more of a pioneer in building the offshore RMB
ecosystem and liquidity. SGX and the Bank of China
signed a memorandum of understanding in 2013 to
invest to strengthen RMB infrastructure in both
markets and include more RMB products and
solutions. The Bank of China Singapore branch
became the first Chinese settlement bank for SGX’s
derivatives market and a market maker for SGX’s
RMB currency futures, which are now among the
most-traded such instruments globally.
SGX remains vigilant on RMB innovation, but
also looks at the state of play realistically.
“Development of RMB internationalisation onshore
is currently independent of offshore,” notes Ms
Kan. “Both needs improved liquidity to support the
growing demand for new products.”
This status quo is unlikely to change until
financial institutions increase investment—
something that the survey results suggest is
unlikely without more regulatory clarity, making it
a chicken-and-egg problem. A lucrative market, it
seems, is still waiting in the wings.
What more-engaged institutions are doing
to prepare for growth
Some financial services institutions are
more prepared for growth in their cross-
border RMB business than others. What does
better preparation look like?
One way to find out is to compare
those institutions that currently get more
than 10% of their total revenues from
international RMB-related business (45%
of the survey respondents) with those that
aren’t yet at this level. A significantly greater
proportion of the “engaged” group are
onshore respondents, and naturally so. In a
hypothetical global market for RMB services,
China firms will be more advanced, and their
views are equally, if not more, instructive
than those of their offshore counterparts.
Keeping clients close
A higher proportion of RMB leaders (47%
vs 39%) says they deploy a specialist or
specialists to liaise with clients to inform
them about RMB developments. More than
half (57%, compared to 47% of the rest)
say they have a team dedicated to assessing
RMB client demand for and knowledge of
international RMB products and investment
services. They are also more likely (47% vs
37%) to have a dedicated research team to
monitor RMB internationalisation.
Focused on functionality
Engaged RMB institutions place a higher
emphasis on operations and systems.
They are more likely (49% vs 38%) to have
a team that focuses on or specialises in
RMB clearing services. They are also more
likely to stress the importance of investing
in communications technology that is
compatible with cross-border standards to
increase their RMB business. Fewer (28%
vs 36%) are concerned over lack of internal
experience in dealing with international
RMB transactions.
Taking responsibility
RMB leaders also seem more likely to act
upon the criticism lodged by Mr Tang of
ICBC Credit Suisse Asset Management that
“Instead of talking about promoting [the
RMB], they should do more to build the
basics outside of China: basic infrastructure,
basic products and basic services.”
Substantially more of the engaged RMB
institutions (63% vs 42%) agree that changes
to the investment climate outside of China’s
control will dictate the adopt of the RMB as a
global investment currency. It’s everyone’s
business, not just China’s.
Ready for lift-off

Acceleration of the RMB’s rise will intensify as
competition for global competency in the
currency builds
Confidence in the RMB is not the same as
commitment. Market growth requires participants
to create new products and services, hammer out
technical codes, and risk capital to invest in new
systems and competencies. But the RMB’s move
toward investment currency status is hobbled by
uncertainty and indecision on the part of the main
players responsible for such developments.
Part of this reflects the timing of the research,
during the dramatic fall of China markets this
summer and the RMB’s devaluation, which has
injected a note of caution into the responses.
Majorities of both offshore (51%) and onshore
(52%) firms put investments on hold owing to the
volatility. The participants closest to the turmoil
and with the most at stake—i.e. China
institutions—are more keenly sensitive to recent
political and economic developments. A majority in
China (56%, compared to 49% offshore) think that
slowing economic growth will make the
government more cautious about lifting capital
controls. Marginally more also think that this
summer’s display of market intervention has made
the government more cautious (63% versus 56%).
The responses may reflect not so much
pessimism as an appropriate grasp of the problems
that the RMB faces on its global rise, and the risks
China and its financial institutions face in rushing
this opening of its capital markets. Indeed, 62%
agree that they have to improve their ability to
compete on a global basis before capital controls
will be eased (versus 47% of the rest of the world
who think this).
China’s responsibility?
One of the more interesting divisions revealed by
this research suggests different views of
responsibility for the currency’s global rise. A
majority in China (58%) agree that changes to the
global investment climate outside the country’s
control will dictate the adoption of the RMB as a
global investment currency. Only 44% of rest-of-
the-world respondents agree. In other words,
those in China think the internationalisation of the
currency will be dictated by global events, while a
majority offshore—doubtless with one eye on the
regulators—think it is up to China.
Despite this view, it is easy to predict that as
Chinese institutions grow and compete due to
government drives to extend economic power
overseas, the rest of the world will respond to the
competitive pressure constructively, becoming
more willing to bear risks to support greater use of
the currency. Part of the responsibility rests solidly
on the shoulders of the international community,
including a willingness to invest more in the
products and services needed. A shift of emphasis
will emerge, in which RMB internationalisation is
taken for granted as a collaboration of self-
interest.
Conclusion:
Towards a
common
currency

In this environment, what will the “prepared”
organisation look like? More-engaged institutions
today are more likely to provide in-house resources
and devote teams to assessing client demand and
build client knowledge. They’re more likely to have
teams devoted to the basics of RMB clearing, and
they are less likely to sit on their hands waiting for
the authorities to open the market before coming
up with innovative products and services. Overall,
this group is more likely to accept risk as the price
of success in an expanding RMB market, devoting
more investment to people, marketing and
systems.
This kind of engagement has driven the
adoption of global denominations before, as the
rise of sterling and the US dollar demonstrated.
When it happens with the RMB, a new era of global
investment currencies will be underway.

Whilst every effort has been taken to verify the accuracy of this
information, neither The Economist Intelligence Unit Ltd. nor the
sponsor of this report can accept any responsibility or liability for
reliance by any person on this report or any of the information,
opinions or conclusions set out in the report.
Cover:WaiLam

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