Whither the yuan? StanChart says ‘global’

A global yuan is considered a keystone of China.s financial reforms, with free money flows opening up domestic capital markets to foreigners.

The spotlight has always been on yuan capital-account convertibility.

Karen Fawcett, group head of transaction banking at Standard Chartered Bank, said her company has held a positive view on the potential of the Chinese yuan since the market first began opening up. The yuan will become a treasury currency and a reserve currency at some point, she predicted. It also has the potential to become the second most important currency after the US dollar.

Fawcett joined Standard Chartered in 2001 and is currently based in Singapore, where the bank.s global consumer, wholesale banking businesses, global technology and operations functions are run.

She is responsible for all sales and product-management teams in transaction banking, comprising cash management, trade services, securities services, and electronic channels.

Prior to her current role, Fawcett was the global head of strategy for wholesale banking at Standard Chartered. She came to the bank after serving as a vice president and partner in US consulting firm Booz Allen Hamilton.

Fawcett has a bachelor.s and a master.s degree both in economics from Cambridge University, and an MBA from INSEAD in Fontainebleau, France.

Sitting in Standard Chartered.s China headquarters in Shanghai.s Lujiazui area, Fawcett talked with Shanghai Daily about how fast the yuan is moving up the ranks as a world trade currency and how the expansion of offshore yuan centers will help its evolution.

Q: Some people say the yuan is becoming a global currency at an unprecedented rate, while others argue there.s plenty more that could have been done. What.s your opinion?

A: There.s no doubt that the yuan will be a very important currency for trade finance.

When the yuan was first set on a course to go global, we predicted it would be used for 20 percent of cross-border Chinese trade by 2015. Well, I think we are pleasantly surprised because it.s close to 15 percent already. We could potentially see 20 percent next year and a rise to 25-30 percent onwards.

We have got to a mature stage of the yuan. So now it.s very important for us to discuss the shift of the yuan into an investment currency and the benefits it is bringing to specific corporations. We are working to find ways for corporations and institutions to embed yuan cross-border transactions in the way they do businesses.

Q: HSBC predicted the yuan would be fully convertible in five years. Do you think that.s viable given the current uncertainties in the global economy?

A: We do not predict when it.s going to be convertible because that.s entirely a matter of when the government is comfortable enough to remove the constraints. I think they have moved far faster in regulatory changes than was ever expected.

China is a massive economy. Given the existing amount of cross-border activities without convertibility, you should probably ask is it worth the risk? Or, do we really need it?

A lot of things are happening in terms of the swap lines that are being put in place. China has swap lines with many countries now, which is giving confidence to the investment community to start using the yuan.

I would separate the use of yuan from its convertibility because convertibility is much more of an economic and political issue than whether people will use the currency.

Q: Do you see yuan capital-account convertibility as a pre-condition of its evolution into an investment currency?

A: It obviously helps, but it.s not a pre-condition. You.ve already seen some Southeast Asian central banks investing in yuan. You.ve seen the rise of the yuan bond market. It has grown 44 percent this year. That.s still small, but it.s growing very quickly, so people will start gradually to invest in the currency.

The Chinese authorities are being very creative on how to start two-way yuan flows and how China can be viewed as a normal treasury center.

Lack of convertibility is not hurting China at the moment. In fact, because of the lack of convertibility, there.s a vast pool of liquidity locked in China, which is probably helping the economy. If there.s full convertibility, you might see a rush of liquidity away from the country.

Q: Do you think Asia.s financial crisis back in 1998 could repeat itself if full convertibility of the yuan triggers large amounts of capital outflows?

A: We think the Chinese government already has been very clever about it. One of the issues is the large amount of liquidity built up by foreign companies that have big operations here. They are very profitable, and they have been unable to repatriate the money. They could repatriate on a dividend basis and they could pay their taxes, but they couldn.t use that money as part of a liquidity management pool across other operations. This is now being further relaxed.

Because China is growing so fast, often they want to keep the money here. The risk is that if you make the yuan convertible today and other operations outside China need more money, the liquidity will be pooled out.

The People.s Bank of China recently enabled a cross-border loan arrangement for multinational companies, where the central bank can study the impact and nature of outflows in a controlled manner.

We were the first foreign bank to participate in this trial. It.s called a pilot program because the PBOC wants to see the effects and how the companies use it.

We.ve been talking to the regulators about how we can work closely with them to support the developments if necessary. That.s a process of evolution where the government takes a step-by-step approach.

Q: What are the emerging trends in the four offshore yuan centers of Hong Kong, Singapore, Taiwan and London?

A: It.s beneficial to have all the offshore centers, but they have different roles. London is the biggest foreign-exchange center in the world. It has the most exchange volume settled every day. So it.s very natural for London to become a very large yuan center.

Singapore is a regional treasury center for Asia and particularly for ASEAN, which is a very relevant role that will help to develop yuan activities.

Hong Kong is a treasury center for North Asia, and Taiwan is a big export market.

When we look at these offshore centers, we have to ask how the pools of liquidity will encourage the development of investment products. If you are simply doing trade finance, you don.t need a pool of offshore yuan because, literally, you just swap currencies but don.t need to hold it.

We are very excited about those pools of offshore yuan deposits enabling people to start investing in it. For example, buying a mutual fund that is denominated in yuan or holding a long-term fixed deposit in yuan. That.s when we get a real shift toward an international currency.

Q: Why doesn.t London need a clearing bank while the other three centers do?

A: That.s being debated all the time. It.s a matter of the strength of technology.

Look back historically at the US dollar, which is settled in Hong Kong, Dubai and few other centers that have offshore US dollar clearing. London is the biggest US dollar settlement market for offshore transactions and it doesn.t have a clearing bank for US dollars. So if it can do without one for the US dollar, why not also for the yuan?

At the moment, yuan clearing is done through the real time gross settlement system in Hong Kong, which is a very robust system.

The question being debated is whether a clearing bank helps to develop liquidity. As an institution, we have been arguing that London does not need a clearing bank. But as for the issue of whether a clearing bank would make people hold liquidity, we don.t know.