China remains one of the U.S.’s largest trading partners.1 As the world’s second largest economy, China is also the number one exporter globally.2, 3 Today, China is a significant contributor to the global economy, representing 16% of the worldwide domestic product.3
Significant efforts have been made by China to open up its markets to foreign companies looking to do business in the region. This presents important opportunities for both financial institutions and international investors that will be transacting in renminbi (RMB), China’s official currency.
Opening China’s markets, internationalizing the RMB
In an attempt to open its markets, China has been engaging in efforts across the country’s financial sector to internationalize the RMB. This past year, a number of key steps were taken to increase offshore adoption of the RMB. For instance, in July 2019, the Chinese Financial Stability Development Committee (FSDC) announced numerous measures developed to further promote international involvement in China’s financial markets from both international investors and financial institutions.4
One important change coming this year is that China will permit foreign entities to wholly-own Chinese securities companies, futures companies and fund management companies.4
In addition, eligible foreign-invested groups will soon be able to serve as class A lead underwriters in the Chinese Inter-Bank Bond Market (CIBM) for all bond types.4 Foreign rating agencies will now be allowed to rate all bonds in the CIBM and the exchange-traded bond market, which may result in greater transparency in China’s bond markets.4
In October 2019, China’s State Administration of Foreign Exchange (SAFE) announced a set of policies intended to promote cross-border trade and investment. One portion of the announcement revealed that restrictions on foreign exchange settlement and use and the number of foreign exchange accounts opened under a capital account would be removed.5
Investment opportunities for foreign financial institutions
Regulatory changes in China have enabled foreign financial institutions to invest and participate in the establishment of the wealth management operations of Chinese commercial banks.4 Foreign financial institutions will also be able to help establish and invest in Chinese pension fund management companies, as well as establish or completely own currency brokerage companies in China.4
Another area of opportunity in China will be in the insurance industry. For the first time, foreign entities will be allowed to wholly-own life insurance companies in the region. Foreign investors will also be able to own more than 25% of Chinese insurance asset management companies.4 Overseas insurance companies with less than 30 years of operations will now be able to establish insurance companies in China. 4
To further promote foreign investment in China’s capital markets, SAFE announced in late 2019 that it would remove quotas associated with the Renminbi Qualified Foreign Institutional Investor (RQFII) and Qualified Foreign Institutional Investor (QFII) programs.6
RMB volumes are growing worldwide
Currently, RMB ranks no.6 as a payments currency and is among the top 3 currencies in the trade finance market worldwide.7 As one of the five key currencies in the Special Drawing Right (SDR) basket established by the International Monetary Fund (IMF), the RMB continues to grow in importance as a global currency.8
By demonstrating the capability to transact in both U.S dollars and RMB, U.S financial institutions may gain greater access to Chinese markets enabling them to help their clients compete more effectively where access to RMB may facilitate transacting more easily with Chinese trading partners. U.S. financial institutions can offer their customers the ability to negotiate their invoicing terms on a currency neutral basis with their Chinese trading partners to allow customers to avoid risk from FX fluctuations. By offering offshore RMB clearing capabilities, financial institutions can enable their clients to transact in both U.S. dollars and RMB, choosing which is most beneficial for their specific needs and requirements.
Leveling the playing field for financial institutions
As the first non-Chinese offshore RMB clearing bank in the U.S. approved by the People’s Bank of China (PBOC), J.P. Morgan is in a position to support other financial institutions with cross-border RMB payment needs. J.P. Morgan offers RMB-denominated accounts for eligible financial institutions in the U.S., facilitating cross-border RMB payments between the U.S. and other countries.
J.P. Morgan’s direct membership in China’s Cross-Border Inter-Bank Payments System (CIPS) gives clients efficient access to CIPS for clearing cross-border RMB payments. Offering offshore RMB in the U.S. allows smaller U.S. financial institutions and businesses to compete more effectively against larger banks that have financial operations outside the U.S. or in places with offshore RMB hubs.
"J.P. Morgan is honored to have been appointed by the PBOC to bring our world-class global clearing capabilities, innovative technology platform, risk controls and operational scale to offshore RMB clearing and to extend important RMB operating services to our clients."
Having a U.S. bank available to clear RMB payments in the North American time zones is advantageous for many financial institutions and their clients because of access to local client service professionals. In addition, clients can benefit from J.P. Morgan’s operational expertise in clearing. This is particularly important as these organizations navigate the increasingly complex payments landscape in China.
To learn more, please contact your J.P. Morgan representative.
“Top Trading Partners - April 2020.” United States Census Bureau, https://www.census.gov/foreign-trade/statistics/highlights/top/top2004yr.html. Accessed 9 June 2020.
“Exports of goods and services (BoP, current US$) – China | Data.” World Bank Group, https://data.worldbank.org/indicator/BX.GSR.GNFS.CD?locations=CN&most_recent_value_desc=true. Accessed 9 June 2020.
“GDP (current US$) | Data” World Bank Group, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true. Accessed 9 June 2020.
“Measures for Further Opening Up the Financial Sector.” The People’s Bank of China, http://www.pbc.gov.cn/en/3688110/3688172/3863256/index.html. Accessed 9 June 2020.
“Circular of the State Administration of Foreign Exchange Further Promoting Cross-border Trade and Investment Facilitation.” State Administration of Foreign Exchange, http://www.safe.gov.cn/en/2019/1025/1596.html. Accessed 9 June 2020.
“Abolish Restrictions on the Investment Quota of Qualified Foreign Investors (QFII/ RQFII) and Further Expand the Opening up of Financial Markets.” State Administration of Foreign Exchange, http://www.safe.gov.cn/en/2019/0910/1552.html. Accessed 9 June 2020.
“RMB Tracker May 2020 – Slides EN.” SWIFT, https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/document-centre. Accessed 9 June 2020.
“Special Drawing Right (SDR).” International Monetary Fund, https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR. Accessed 9 June 2020.
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