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Managing risk exposures as China opens up

Regardless of how the trade war between China and the United States plays out, we can remain confident that China will continue in its journey of opening up. A few years ago, a colleague mentioned that the renminbi (RMB) is on an irreversible journey of internationalization, and that the only question is the speed of travel, not the direction. This quote is still applicable today in terms of China’s current trajectory.

Opening the Gates

A clear example of China’s commitment to opening up its market is the establishment of the Greater Bay Area (GBA) initiative. The 11 cities in Pearl River Delta are being developed as a hub for innovation, technology, infrastructure and financial services. Developments in high speed rail, and Shenzhen’s role as a technology hub are but two instances.

Another manifestation of China’s commitment is how it is increasingly allowing for foreign investments into the country. China launched Bond Connect and China interbank bond market (CIBM) Direct Access in the past few years for foreign investors to access onshore China bond markets. Going hand-in-hand, they allow foreign-funded institutions to conduct credit rating business for all types of bonds in CIBM.

RMB Risks

That said, the market continues to watch the trade negotiation developments closely as trade tension escalates between the two biggest economies in the world. So what should corporations and financial institutions with commercial dealings with China do? They need to set up a framework to manage FX risks.

The RMB is no longer on a one-way journey of appreciation or depreciation. Organizations with commercial links to China should look into establishing a program to manage RMB risks. With recent regulatory developments, offshore entities can now access the onshore RMB FX market via CFETS, in addition to the offshore CNH and CNY NDF markets.

The times are changing. But China’s direction of travel in terms of how it is opening up is without a doubt. Organizations looking to jump onto the rising tide would do well to evaluate exposure regularly.

This article was also published by AFP.

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