This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.

From Oct 1, the renminbi will be included in the International Monetary Fund’s basket of currencies. This is a major milestone as it will be recognised as an international reserve currency.

Bank Negara and Securities Commission Malaysia (SC) on March 8 jointly issued a guidance note to facilitate the process of obtaining the RMB Qualified Foreign Institutional Investor (RQFII) licence. RQFII is a regime that allows asset managers to raise renminbi-denominated funds or products offshore to invest in the Chinese market.

But, in terms of trade settlement, although China is Malaysia’s largest trading partner, settlement in the currency is still minimal, Bank of China (M) Bhd’s (BoC) CEO Wang Hongwei points out.

Barely 2.6% of trade between China and Malaysia were settled in renminbi as at end-2015 although it is an increase from 1.4% in 2014. According to Bank Negara, payments and receipts denominated in renminbi have shown a significant increase, with volume more than doubling to RM6.1 billion in 2015 (2014: RM2.9 billion).

In the domestic financial markets, SWIFT data dated February 2016 shows that Malaysia’s use of the currency for trade with China and Hong Kong increased 68% over the last 12 months and 214% over the last three years. Since January 2013, the renminbi has moved from No 3 to No 2 for payments by value, overtaking the ringgit as the choice settlement currency with China and Hong Kong.

It is known that BoC — a wholly owned subsidiary of the world’s fourth largest bank and one of the five biggest state-owned commercial banks in China — has an important role to play in promoting the usage of the currency.

The bank, which has been appointed by Bank Negara as a renminbi settlement institution and an offshore renminbi clearing bank by The People’s Bank of China (PBoC), agrees that it is facing a tougher task in promoting the renminbi in Malaysia compared with other regions such as South Korea and Singapore.

“The currency exchange agreement between China and Malaysia was signed six years ago, and the application for RQFII is only the second stage, but a core issue that remains unsolved is the establishment of a direct exchange mechanism between the renminbi and the ringgit. This has led to higher transaction costs,” Wang tells The Edge in an interview.

Currently, most transactions between the countries are still being settled in US dollars, he says. This has created more uncertainty and requires banks to do settlement or hedging, which leads to higher trading cost.

“We have been thinking of ways to promote the usage of the renminbi, but it seems that everyone is taking their time. Therefore, we note that it’s quite difficult [to implement here],” Wang says.

Malaysia was the first country to sign a currency exchange agreement with China. However, Wang finds that Malaysia seems to be lagging behind other countries that signed the similar agreements later. 

He cites South Korea as a success story, saying that progress has been encouraging. When the South Korean government initiated the exchange programme, it set a direct exchange mechanism, paving the way for the renminbi to become a currency for investment, foreign reserves and balance of payment. Thus, most South Korean corporates are investing in the currency.

In Asean, Singapore has signed contracts in renminbi and executed the exchange programme. The government has been actively promoting market liquidity and encouraging businessmen to use the currency to satisfy China’s trade and investment requirements.

“Given the significant backdrop of trade relationship and evolution of financial linkages between Malaysia and China, both countries have been promoting the use of the renminbi as a settlement currency for bilateral trades, according to Bank Negara.

To this end, Bank Negara says it has worked closely with PBoC to introduce several measures to facilitate the objectives.

An important piece of the infrastructure that was put in place in 2010 was the provision of direct MYR/RMB quotes in the interbank foreign exchange market on the China Foreign Exchange Trade System (CFETS).

To date, four financial institutions have been appointed as market makers on the CFETS, namely the Industrial and Commercial Bank of China Ltd (ICBC), Bank of Communication Co Ltd, HSBC China and Maybank Shanghai,” says Bank Negara in response to The Edge’s question on the low quantity of trade settlements.

For Malaysian customers, direct MYR/RMB quotes by Malaysian banks are already available on Reuters and Bloomberg and Bank Negara publishes the exchange rate information on its website.

To provide greater efficiency and competitiveness in renminbi trade settlements, Bank Negara has also included the currency in its real-time gross settlement services via Real-time Electronic Transfer of Funds and Settlement System (Rentas) for efficient settlement of renminbi trades in Malaysia and to eliminate settlement risks for renminbi transactions.

To this end, BoC has been appointed the onshore settlement institution (OSI) for the Renminbi Settlement System (RSS). Subsequently, PBoC has also appointed BoC as the renminbi clearing bank in Malaysia to facilitate and promote the use of the currency in cross-border transactions as it has direct access to the onshore China interbank market.

Wang dismisses talk that the currency’s recent volatility is the root cause of the lengthy process in setting up the direct exchange mechanism for the ringgit and the renminbi.

Malaysian RQFII investor to emerge soon 

While the investing fraternity expects the take-up of RQFII to be slow due to the volatility of the Chinese market in the last few months, Wang thinks the volatility is just a short-term issue and does not expect the RQFII programme to be affected significantly. “As SC has announced the application procedure, BoC has now discussed the investment arrangement with several corporations, thus, we believe that there will be a first RQFII investor from Malaysia soon,” Wang says.

He also emphasises that there are many banks involved in the Qualified Foreign Institutional Investor (QFII) programme and they know the Chinese capital market. “As we know, a few large sovereign entities have set up credits to hold renminbi assets.”

According to Wang, although China’s capital market has been volatile since last year, based on the China Securities Regulatory Commission (CSRC)’s RQFII approval rates, the worldwide application rate for RQFII has remained strong. Last year, 66 corporations applied for RQFII, with a total amount of RMB139.3 billion (equivalent to about RM83.38 billion). All the applicants are not based in Hong Kong. In the previous year, 56 corporations applied for RQFII, with a total amount of RMB251.1 billion (equivalent to about RM150.3 billion).

Growing the business

BoC is eyeing the growing wealth management business and is tapping “One Road, One Belt” business opportunities, but faces stringent regulations.

For Malaysians, BoC seems to be a latecomer in the banking industry. Many may overlook the fact that it is actually one of the oldest banks in Malaysia. It was set up in 1939 but ceased operations in 1959. Following the rapid economic and trade development between Malaysia and China, it recommenced business as a full-fledged commercial bank on Feb 23, 2001.

Today, although BoC is the fourth largest bank in the world, based on Forbes Global 2000, in Malaysia, it is considered relatively small. Its market share in retail and corporate banking is less than 1%.

Wang elaborates on BoC’s history. “Back in 1939, we started our business in Singapore, servicing Chinese in the Nanyang region who were trading and investing in foreign countries. At that time, BoC had a strong influence on the overseas Chinese communities as they needed to transfer money back home and no other banks were able to offer the service. However, when it shuttered, it was replaced by other banks. Who were they? It must have been banks like HSBC.”

Therefore, Wang does not think that BoC is a latecomer. In the last 15 years, it has achieved significant progress in other countries such as Australia, South Korea and Hungary.

However, he remains positive on the group’s outlook. In terms of corporate banking, he targets to support Malaysia’s corporations in tapping the global opportunities provided by “One Belt, One Road”. As for retail banking, he eyes the growing wealth management business.

As Malaysia is a great partner for “One Belt, One Road”, he believes the potential is huge. “I am determined to grow our business, but we may need the regulator to relax some rules,” Wang concludes. 

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