Tag: Chinese yuan renminbi

Southeast Asia moves closer to economic unity with new regional payments system

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Indonesian President Joko Widodo makes a speech during the Association of Southeast Asian Nations (ASEAN) Foreign Minister’s Meeting in Jakarta, Indonesia on July 14, 2023.

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A new regional cross-border payment system recently implemented by Southeast Asian nations could deepen financial integration among participants, bringing the ASEAN bloc closer to its goal of economic cohesion.

The program, which allows residents to pay for goods and services in local currencies using a QR code, is now active in Indonesia, Malaysia, Thailand and Singapore. The Philippines is expected to join soon.

That’s according to each country’s respective central bank.

The move comes after the five Southeast Asian countries signed an official agreement late last year. At the recent ASEAN summit in May, leaders also reiterated their commitment to the project, pledging to work on a road map to expand regional payment links to all ten ASEAN members.

The scheme is aimed at supporting and facilitating cross-border trade settlements, investment, remittance and other economic activities with the goal of implementing an inclusive financial ecosystem around Southeast Asia.

Analysts say retail industries will particularly benefit amid an expected rise in consumer spending, which could in turn strengthen tourism.

Regional connectivity is considered crucial to reduce the region’s reliance on external currencies like the U.S. dollar for cross-border transactions, particularly among businesses. The greenback’s strength in recent years has resulted in weaker ASEAN currencies, which hurts those economies since the majority of the bloc’s members are net energy and food importers.

“The system will forgo the U.S. dollar or the Chinese renminbi as intermediary,” said Nico Han, a Southeast Asia analyst at Diplomat Risk Intelligence, the consulting and analysis division of current affairs magazine The Diplomat.

A unified cross-border digital payment system will “foster a sense of regionalism and ASEAN-centrality in managing international affairs,” he added. “This move becomes even more crucial in light of escalating tensions among major global powers.”

How it works

By connecting QR code payment systems, funds can be sent from one digital wallet to another.

These digital wallets effectively act as bank accounts but they can also be linked to accounts with formal financial institutions.

For instance, Malaysian tourists in Singapore can make a payment with Malaysian ringgit funds in their Malaysian digital wallet when making a transaction. Or, a Malaysian worker in Singapore can send Singapore dollar funds in a Singaporean digital wallet to a recipient’s wallet in Malaysia.

Fees and exchange rates will be determined by mutual agreement between the central banks themselves.

For now, a region-wide system like this doesn’t exist in other parts of the world but down the road, the Bank of International Settlements, based in Switzerland, hopes to connect retail payment systems across the world using QR codes and mobile phone numbers.

“The ASEAN central banks’ effort is innovative and novel,” said Satoru Yamadera, advisor at the Asian Development Bank’s Economic Research and Development Impact Department.

“In other regions like Europe, retail payment connection via credit and debit cards is more popular while China is well-known for advanced QR code payment, but they are not connected like the ASEAN QR codes,” he continued.

Economic benefits

QR payments don’t impose fees on cardholders and merchants. They also boast of better conversion rates than those set by private payment processors like Visa or American Express.

Micro enterprises as well as small- and medium-sized businesses, or SMBs will emerge as winners from regional payment connectivity, experts say. According to the Asian Development Bank, such companies account for over 90% of businesses in Southeast Asia.

“SMBs can avoid the expenses associated with maintaining a physical point-of-sale system or paying interchange fees to card companies,” explained Han from Diplomat Risk Intelligence.

Marginalized individuals from low-income backgrounds also stand to benefit. As the payment system works via digital wallets and doesn’t require a traditional bank account, it can be used by the unbanked population.

“The system has the potential to improve financial literacy and wellbeing for the underbanked population,” Han noted.

ASEAN’s new system will also enable merchants and consumers to build a robust payment history, and provide valuable data for credit scoring, said Nicholas Lee, lead Asia tech analyst at Global Counsel, a public policy advisory firm.

“That’s particularly advantageous for unbanked and underbanked segments of the population, who traditionally lack access to such credit assessment data.”

Moreover, “increased non-cash transactions would allow policymakers to capture transaction data and trade flow more effectively, assuming these data are accessible,” said Lee.

“This, in turn, could lead to better economic forecasting and policymaking.”

Currency pressure ahead

While strengthening payment connectivity within the region has the potential to reduce payment friction and accelerate digital transition, it could inadvertently put pressure on certain currencies, particularly the Singapore dollar.

“The potential scenario of the [Singapore dollar] emerging as a de facto reserve currency within the region poses a challenge that ASEAN states will need to confront,” said Lee.

“With the [Singapore dollar’s] strength and stability, both international and regional businesses may opt to hold more of their working capital in [Singapore dollars], relying on the new payment network for efficient currency conversion,” he explained.

If that happens, it could weaken the purchasing power of other currencies in the region and result in higher imported inflation if central banks don’t intervene.

In such a scenario, authorities may feel the need to impose capital restrictions in order to protect their respective currencies, which could undermine the very purpose of establishing a regional payment network.

Regulations pose another challenge.

Central banks will have to address security and fraud issues, plus undertake the task of educating the public to embrace the new payment system, said Han.

“These factors can collectively contribute to a time-consuming process,” he warned.

This kind of coordinated action will require strong political will from regional leaders and it remains to be seen if ASEAN members can come together to successfully implement such an ambitious venture.

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July 30, 2023
HKEX’s new dual counter scheme ‘solidifies’ Hong Kong’s role as yuan trading hub, CEO says

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HONG KONG, CHINA – JUNE 05: A pedestrian walks by an electronic screen displaying the numbers for the Hang Seng Index on June 5, 2023 in Hong Kong, China. (Photo by Chen Yongnuo/China News Service/VCG via Getty Images)

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Investors will now be able to trade selected Hong Kong stocks in both the Hong Kong dollar and Chinese yuan in the so-called dual counter scheme that launched Monday.

The newly launched “HKD-RMB Dual Counter Model” will see an initial 24 companies start offering yuan counters to allow investors in Hong Kong to trade in the yuan, in addition to the Hong Kong currency. Companies on the list include tech heavyweights like Tencent, Alibaba and Baidu.

The dual counter model covers securities listed in both Hong Kong dollar and renminbi counters only. The Hong Kong Exchange said all shares of the same securities in the two different trading counters will be “fully interchangeable between counters.”

In an exclusive interview on CNBC’s “Squawk Box Asia,” Hong Kong Exchanges and Clearing CEO Nicolas Aguzin said the move was aimed at giving investors more options for investments, as well as more diversification possibilities.

“This program is aimed at number one, making sure that we give more options to investors. Number two, that we continue helping on the internationalization of the renminbi.” Thirdly, he said it “solidifies” Hong Kong’s role as a yuan trading hub.

The HKEX CEO noted that the initial batch of 24 companies make up about 40% of the average daily trading volume in the Hong Kong.

“We would expect that to continue expanding,” he added. “And over time, I think a great majority of the stocks in our markets will be participating in this program.”

With trading volumes in Hong Kong at a four year low, Aguzin said he expects an increase in turnover from the new dual connect model, noting there are “a lot” of yuan deposits in Hong Kong. As such, “you’re tapping a liquidity pool that is in renminbi that will now be able to invest directly,” he pointed out.

The key objective is to simplify the southbound flow of investments from the mainland, Aguzin said.

Investments from the mainland are currently carried out via the Southbound Stock Connect, which allows mainland investors to purchase Hong Kong stocks in Hong Kong dollars.

Stock Connect is a mutual market access program that allows investors in mainland China to trade and settle shares in Hong Kong via exchanges and clearing house in their home market, and vice versa.

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Aguzin highlighted that it’s “very inconvenient for the mainland investors, [and] the fact that they will 1687155004 be able to transact in an instant basis in renminbi, that’s a huge difference.”

He foresees more investment flow from the mainland, especially from retail investors.

“One of the challenges of Hong Kong is it’s only 7 million people. So it’s very limited in terms of retail. But the mainland, 1.4 billion people, that’s a lot. And a lot of that can come through Stock Connect and help liquidity in our market.”

The dual counter model will initially target the offerings at investors holding offshore yuan, and eventually, enable mainland investors to trade yuan stocks listed in Hong Kong using onshore yuan, Reuters reported.

While there is no firm date for when investments via Stock Connect will be able to access the dual counter model, Aguzin said this will take a little bit of time, and the HKEX is working closely with regulators and other stakeholders to make sure everything will be in place before making an announcement.

Not the first try

This is not the first time that such a scheme is being introduced in Hong Kong.

In 2012, the Hong Kong exchange launched a similar scheme called the “dual tranche, dual counter” model, which allowed the issuer to offer and list two tranches of shares in both the Hong Kong dollar and Chinese yuan.

As with today’s dual counter model, shares of both RMB tranche and the HKD tranche were of the same class, and shareholders under these two tranches are expected to be treated equally.

According to Bloomberg, that scheme failed to take off when only one company took it up.

The difference this time is that there is a “dual counter market maker program” — aimed at providing liquidity to the yuan counter and minimizing price discrepancies between the Hong Kong dollar and yuan counters.

Aguzin said there are currently nine of these market makers that have signed up, and he thinks this “should encourage a lot of activity and [make] sure that the markets are really stabilized in both markets.”

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June 18, 2023
Calls to move away from the U.S. dollar are growing — but the greenback is still king

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Calls to move away from relying on the U.S. dollar for trade are growing.

More and more countries — from Brazil to Southeast Asian nations — are calling for trade to be carried out in other currencies besides the U.S. dollar.

The U.S. dollar has been king in global trade for decades — not just because the U.S. is the world’s largest economy, but also because oil, a key commodity needed by all economies big and small, is priced in the greenback. Most commodities are also priced and traded in U.S. dollars.

But since the Federal Reserve embarked on a journey of aggressive rate hikes to fight domestic inflation, many central banks around the world have raised interest rates to stem capital outflows and a sharp depreciation of their own currencies.

“By diversifying their holdings reserves into a more multi-currency sort of portfolio, perhaps they can reduce that pressure on their external sectors,” said Cedric Chehab from Fitch Solutions.

To be clear, the U.S. dollar remains dominant in global forex reserves even though its share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999, IMF data shows.

The U.S. dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter last year, according to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER). Comparatively, the euro is a distant second, accounting for about 20.5% of global forex reserves while the Chinese yuan accounted for just 2.7% in the same period.

China is one of the most active players in this push given its dominant position in global trade right now, and as the world’s second largest economy.

Based on CNBC’s calculation of IMF’s data on 2022 direction of trade, mainland China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the U.S. was the largest trading partner to 30 countries.

“As China’s economic might continues to rise, that means that it’ll exert more influence in global financial institutions and trade etc,” Chehab told CNBC last week.

China — long among the top 2 foreign holders of U.S. Treasurys — has been steadily reducing its holdings of U.S. Treasury securities.

Mainland China held nearly $849 billion of U.S. Treasurys as of February this year, the latest data from the U.S. Treasury department showed. That’s at a 12-year low, according to historic data.

Changing dynamics

Economic benefits

Analysts say changing global economic dynamics are driving the co-called de-dollarization trend which can benefit local economies in a number of ways.

Trading in local currencies “allow exporters and importers to balance risks, have more options to invest, to have more certainty about the revenues and sales,” former Brazilian ambassador to China, Marcos Caramuru, told CNBC last week.

Another benefit for countries moving away from using the dollar as the middle man in bilateral trade, is to “help them move up the value chain,” said Mark Tinker from ToscaFund Hong Kong told CNBC “Street Signs Asia” early April.

“It isn’t about selling cheap stuff to Walmart, keeping down the prices for American consumers in order to earn dollars to buy its energy. This is now about actually a completely bilateral trade bloc,” Tinker said.

Meanwhile, growth of non-U.S. economic blocs also encourage these economies to push for wider use of their currencies. The IMF estimates that Asia could contribute more than 70% to global growth this year.

“U.S. growth might slow, but U.S. growth isn’t what it’s all about anymore. There is a whole non-U.S. block that’s growing,” said Tinker. “I think there is going to be a re-internationalization of flows.”

Geopolitical concerns

Geopolitical risks have also accelerated the trend to move away from U.S. dollar.

“Political risk is really helping introduce a lot of uncertainty and variability around how much of a safe haven that U.S. dollar really is,” said Galvin Chia from NatWest Markets told “Street Signs Asia” earlier.

Tinker said what accelerated the calls for de-dollarization was the U.S. decision to freeze Russia’s foreign currency reserves after Moscow invaded Ukraine in February 2022.

The yuan has reportedly replaced the U.S. dollar as the most traded currency in Russia, according to Bloomberg.

So far, the U.S. and its western allies have frozen more than $300 billion of Russia’s foreign currency reserves and slapped multiple rounds of sanctions on Moscow and the country’s oligarchs. This forced Russia to switch trade to other currencies and increase gold in its reserves.

“Now you find that if you disagree with U.S. foreign policy, you risk having those confiscated or frozen. You’ve got to have alternative place to put those assets,” Tinker said. In the Middle East, major oil exporter Saudi Arabia has reportedly signaled it’s open to trade in other currencies other than the greenback.

Although analysts don’t anticipate a complete break away from dollar-denominated oil trade over the short-term, “I think what they’re saying more is, well, there’s another player in town, and we want to look at how we trade with them on a bilateral basis using yuan,” said Chehab.

Dollar is still king

Despite the slow erosion of its hegemony, analysts say the U.S. dollar is not expected be dethroned in the near future — simply because there aren’t any alternatives right now.

“Euro is somewhat an imperfect fiscal and monetary union, the Japanese yen, which is another reserve currency, has all sorts of structural challenges in terms of the high debt loads,” Chehab told CNBC.

The Chinese yuan also falls short, Chehab said.

“If you look at the yuan reserves as a share of total reserves, it’s only about 2.5% of total reserves, and China still has current account restrictions,” Chehab said. “That means that it’s going to take a long time for any other currency, any single currency to really usurp the dollar from that perspective.”

Data from IMF shows that as of the fourth quarter of 2022, more than 58% of global reserves are held in U.S. dollar — that’s more than double the share of the euro, the second most-held currency in the world.

The international reserve system “is still a U.S.-reserve dominated system,” said NatWest’s Chia.

“So long as that commands the majority, so long as you don’t have another currency system or economy that’s willing to step up to that international reach, convertibility and free floating and the responsibility of a reserve currency, it’s hard to say dollar will be displaced over the next 3 to 5 years. unless someone steps up.”

— CNBC’s Joanna Tan and Monica Pitrelli contributed to this report.

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April 23, 2023