Fresh winds of change are blowing into Asian currency markets and two of the region’s most tightly controlled units of exchange have generated something akin to gale force winds. Bold moves from regulators in China and Malaysia to enhance the convertibility of their currencies and allow greater access by offshore investors to the ringgit and renminbi denominated securities stirred much excitement.
On August 19 2010, China allowed the trading of the renminbi against the Malaysian ringgit in its interbank foreign exchange (FX) market, a step considered significant in light of Beijing’s recent attempts to accelerate the internationalization of its currency. China’s push for the ringgit was complemented by Malaysia’s Bank Negara’s decision (in the same week) to publish new rules that will streamline FX administrations so as to improve the convertibility of the Malaysian ringgit for spot transactions.
These developments are taken to be the strongest signal yet that regulators are establishing the necessary momentum in reshaping the future of currency trading in the region, presently largely focussed on the US currency. The head of the structured products team in one of Malaysia’s largest banks describes the developments as “powerful and highly significant,” considering that the relaxations are happening in – what are considered to be – the region’s two most tightly controlled currencies.
The ringgit is the sixth currency allowed to trade against the renminbi, and Beijing’s move to favour it over other Asian currencies came as a surprise to observers in the region who had considered the Korean won to be a more likely contender to be allowed to trade with the renminbi, in view of both Seoul’s greater engagement with the global economy and the robust trade relationship between the two economies.
Easier bilateral trade
By further enhancing the convertibility of the ringgit, the Malaysian central bank has made it cheaper and easier for exporters and importers to transact. Bankers credit the robust relationship which the Malaysian central bank has built with Chinese authorities. China was Malaysia’s largest trading partner in 2009, with total exchanges worth US$36.3 billion.
David Liao, managing director and head of global markets at HSBC China, agrees that the new currency pair will facilitate bilateral trading and investment activities between mainland China and Malaysia. HSBC China has been appointed a market maker for the currency pair. It was one of only three banks and the only foreign bank designated to provide liquidity for the trading of China’s sixth currency pair.
Leong Waiho, an analyst at Barclays Capital, says that – overall – the streamlining of FX rules should further enhance Malaysia’s appeal as an investment destination. He admits that the move does not yet represent a return to pre-1998, when the ringgit was freely convertible in Singapore, but notes that the convertibility ceilings for the ringgit have been quite attractive in recent years. The latest relaxation, he adds, means that transactions above 100 million ringgit (US$32 million) will not require central bank approval.
Leong notes, however, that important questions remain unanswered in the Bank Negara press release regarding the convertibility of the ringgit against the renminbi. “A key concern for us is the treatment of forward transactions – which is not explained in the release. For instance, it is still unclear if non-residents will be allowed to hedge on the forward market. If not, it means that the non-deliverable forward (NDF) market will likely continue to operate offshore. We will await further clarification from the central bank.”
Beijing’s new initiatives regarding the ringgit-renminbi currency pair came after the Chinese central bank on August 17 said that it would open the renminbi bond market to funds accumulated overseas through trade settlement of central bank swaps. Beijing has made clear its intention to etch out a greater role for the renminbi regionally, and has designated Hong Kong as an offshore renminbi centre that is allowed to offer offshore renminbi products. This has energized the city’s financial community with several asset managers offering renminbi-denominated products including deposits, funds and structured products.
Solidifying Hong Kong
Standard Chartered Bank, meanwhile, earned bragging rights as the bank that brought the first renminbi corporate bond issued in Hong Kong by a multinational company. The Hong Kong unit of the bank announced on August 20 that it helped McDonald’s Corporation launch a path-breaking deal and expressed optimism that the deal could be the start of a strong pipeline of deals where international companies use Hong Kong to raise working capital for their China operations.
The 200 million renminbi (US$29.5 million) 3% notes due September 2013 are targeted at institutional investors. The bank said the bond offering generated “good” investor interest for its high credit quality, name recognition and rarity value. It did not mention in its statement, however, the exact level of investor interest the bond generated.
Sundeep Bhandari, Standard Chartered’s regional head of global markets, Northeast Asia, says the transaction will help solidify Hong Kong’s status as a renminbi offshore centre. The bank has already introduced renminbi-denominated structured investments in the city. Hong Kong banks are literally in a race to offer renminbi-denominated products into a market highly optimistic about the direction of the Chinese currency against the US dollar.
Benjamin Hung, chief executive officer of the bank’s Hong Kong unit, says the bank will offer more renminbi products to help boost the city’s growing status as a renminbi offshore centre. The bonds are not registered under the US Securities Act of 1933, and so cannot be offered or sold in the US. Barclays says the timing of Bank Negara is significant since it was announced immediately ahead of the FTSE review on whether Malaysia can qualify for an upgrade to its advanced emerging market equity basket.
“The rule changes, in particular the abolition of hard limits in the FX regulations, were intended to increase Malaysia’s chance of qualifying for the FTSE upgrade,” states Hung. If the latter materializes, it could trigger expectations of an increase in Malaysia’s weighting in the MSCI equity index, which will likely increase portfolio investment into Malaysia.
Another key driver for the ringgit is the government’s privatization plan. Leong says capital inflows are expected to rise significantly as the government divests its sizeable holdings of non-core assets. The privatization initiative is spearheaded by the state-owned oil company, Petronas, which is expected to sell significant stakes in its petrochemicals subsidiary and Malaysia Marine & Heavy Engineering, a unit of MISC Berhad (63%-owned by Petronas).
Barclays notes that government agencies, such as the Employees Provident Fund (EPF), the state-run pension fund and Khazanah, could sell stakes in government companies to enhance liquidity on the domestic stock exchange.
