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US, China Issue RMB Commitments

The
US and China have jointly issued a set of new commitments aimed at developing
renminbi (RMB) trading and clearing in the US, while simultaneously improving
access by US institutional investors to Chinese capital markets.

In
the latest China-US Strategic and Economic Dialogue (S&ED) published today,
China said that it would designate RMB clearing banks in the US as an
additional mechanism to clear RMB alongside correspondent bank relationships.

China
also agreed an initial extension of a 250 billion RMB Qualified Foreign
Institutional Investor (RQFII) quota to the US, which US institutions should be
able to get licenses for by the end of the year. According to the agreement,
China is to increase the US RQFII quota according to market development and
demand.

Finally,
it was determined in the S&ED that the US. Department of the Treasury and
the People’s Bank of China are to jointly assess, no less than annually, RMB
trading and clearing mechanisms in the US.

The Working Group on US RMB Trading and Clearing, which was formed to carry out the bilateral
mandate to explore new ways to facilitate RMB trading agreed to by President
Obama and President Xi during the US-China summit in September 2015, was quick
to issue a statement praising this announcement.

“I want to
congratulate US and Chinese leaders on a productive Strategic & Economic
Dialogue, and it’s very encouraging that both sides have endorsed a framework
for facilitating RMB trading and clearing in the US for the first time,” says Michael
Bloomberg, chair of the working group and founder of Bloomberg LP. “This will
help bring new momentum to the working group’s efforts to expand trade between
the US and Chinese by allowing the RMB to be cleared in the US.”

The working group also
issued a release today, publishing a range of recommendations that had been
distributed to US and Chinese authorities on June 2.

These recommendations
follow on from a survey of global corporates conducted by the working group
that was designed to assess the demand for RMB-denominated products and services
in the US.

The results showed
that demand is growing, and could be fueled by the occurrence of certain
events, such as the potential inclusion of Chinese debt and equity securities
in major securities indices.

The working group says that the findings also
suggest that US-based customers, especially small- and middle-market
businesses, would like more options to use RMB in the US to reduce the
complexity, costs and inefficiencies currently associated with accessing
overseas accounts and making and receiving RMB payments.

“The recommendations
of the working group and the S&ED actions are a win for the American,
Chinese and global economies. American Main Street businesses will gain the
access and tools to be competitive, as the yuan continues to evolve gradually
as an international currency,” says Thomas Donohue, president and CEO of the US
Chamber of Commerce. “This is critical for a growing domestic and global
economy.”

Based on these findings, the working group’s
Roadmap for Action includes commitments by various group members to explore
targeted investments designed to meet future growth in RMB payments, products
and services quickly and cost effectively.

These actions include
making improvements in domestic banking services, including streamlining
correspondent banking services and developing expanded multicurrency account
capabilities.

Additionally, it recommends enhancements to
existing financial market infrastructures to allow the clearing and settlement
of RMB payments and RMB-denominated financial instruments.

However, as Profit & Loss previously reported, questions remain over whether China will choose to build its
own clearing and settlement infrastructure or choose to adopt CLS for this
function
.

The roadmap also advocated the development of
new markets, including RMB-denominated cash management and fixed income
products issued in the US.

In addition to these recommendations, the
working group proposed that US and Chinese authorities consider several policy
actions designed to provide increased incentives to transact and invest in RMB.

These include improving access to Chinese
capital markets for US-based participants via a significant RQFII allocation of
a minimum of $30 billion.

Other policy proposes
were to create an agreed-upon framework for establishing one or more RMB clearing
banks or clearinghouses in the US and taking steps to institutionalise an
ongoing dialogue regarding RMB internationalisation between the US and China.

The internationalisation of the RMB was
also touched upon in the S&ED, in which China reiterated its plans to
continue with market-orientated reform, allowing for two-way flexibility in the
value of RMB.

“China stresses that there is no basis
for a sustained depreciation of the RMB,” it was noted in the S&ED.

galen@profit-loss.com

@Galen_Stops

@Profit_and_Loss 

Galen Stops

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