While many observers might have expected the G20 Summit to be just another gathering featuring top policymakers from around the world, in his opening speech, President Xi Jinping urged the participating dignitaries to avoid "empty talk" and called for actions to stimulate the global economy. Indeed, several notable developments occurred over the past week which we will cover in the following paragraphs.
The Steel Industry May Not Benefit From Investment
In the Summit, the G20 leaders acknowledged that trade and investment flows are the key elements of global growth, which have not been functioning well in recent years. 1Having a common objective of achieving global growth and stability, the G20 leaders agreed that the trade and investment mechanism must be strengthened, and that would partly be supported by the establishment of the G20 Trade and Investment Working Group. Especially for cross-border investment flows, they suggested that the 11 multilateral development banks should play an instrumental role in facilitating the development of quality infrastructure projects.
While further expenditure on infrastructure investment could lead to expectations of higher demand for building materials like cement and steel, the leaders have singled out the steel industry and hinted that further investment in the industry would not be justifiable given the oversupply situation. Indeed, in an earlier press conference, European Commission President Jean-Claude Juncker blamed the loss of jobs in the European steel industry on overcapacity, with the Chinese steel industry – which accounts for roughly half of the world production of crude steel – being a major target (see Table 1).
The G20 leaders agreed that the OECD would lead a global forum on investigating excess capacity in the steel sector and report back to the G20 ministers in 2017. With such developments, we believe Chinese steel mills that are running on a thin margin will likely face mounting pressure.
SDR Bond Issuance Gives a Push to RMB Internationalisation
The People's Bank of China (PBOC) previously suggested that the first issue of a special drawing right (SDR) bond in China could happen in August2. This prediction materialised as the World Bank sold an SDR bond in Mainland China in late August, an issuance not occurring since the 1980s. While the SDR bond – to be settled in RMB – was the first of its kind, it is not likely to be the last. With the 500 million SDR units (roughly US$700 million) of three-year notes sold in the Mainland – part of the World Bank’s new issuance programme to raise about US$2.8 billion (i.e. 2 billion SDR units)3 – we consider this part of a roadmap that aims to boost the flow of RMB in the international market through slowly opening up foreign access to the bond market in the Mainland.
The development is in parallel with the Mainland’s intention of boosting RMB usage. On 10 August, the PBOC said further development of cross-border investment and financing channels would lead to wider usage of RMB, which will boost the currency’s status as a reserve currency further.4 Indeed, referring to the Triennial Central Bank Survey of foreign exchange and derivatives market activity carried out by the Bank for International Settlements (BIS), the usage of RMB jumped by over 68% in three years (see Table 2).
As shown in the post-Summit communiqué, other international organisations, such as the IMF and the development banks, may follow the World Bank’s lead and issue SDR bonds. This will, in turn, further increase the flow of RMB in the international markets.
Embrace the Developments
Against the backdrop of such developments, while Hong Kong will not likely be directly affected by the pressure on the Chinese steel sector, the local financial sector can seize the opportunities in the RMB internationalisation process, particularly as more and more Belt and Road projects will take place in the near future. On the latter, the Chamber, led by the Financial Services and Treasury Committee, submitted a paper to the Government proposing the need to develop the bond market in Hong Kong, as well as strengthening our role as a corporate treasury centre hub (see here). Members can refer to the submission for further details.
1 G20 Leaders’ Communique Hangzhou Summit 2 China to lead way with landmark SDR bond offerings (1 August 2016) Reuters 3 World Bank Approved as the First SDR Bond Issuer in China (12 August 2016) The World Bank 4 People’s Bank of China (10 August 2016)
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