Use of China’s renminbi is increasing rapidly despite the country’s slowing economy and the time is now for the new leadership to push it as a major international currency. John McCormick, CEO, Markets & International Banking and Chairman, RBS Group, APAC, explains.
Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD5-6 billion daily – double what they were a year ago.
A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.
First, the International Monetary Fund is reviewing its special drawing rights basket, which uses four key international currencies to supplement member countries’ official reserves and bolster liquidity.
The deadline for completing that review is 2015. Based on where we see the G7 countries today, we believe there’s a very strong chance that China can get the onshore version of RMB, CNY, into that basket – a real boost to the currency on the world stage.
Also, the Shanghai Municipal Government has set a goal of making the city the global pricing centre for both onshore and offshore RMB financial products by 2015 and a global financial centre by 2020. These goals clearly set the blueprint for the internationalisation of the currency.
Then there is China’s work alongside the UK Government promoting London as a CNY centre, operating in partnership with Hong Kong. Achieving this would make London the first CNY hub outside China and be a big step towards an international RMB.
It is likely that, as part of this, the People’s Bank of China (PBOC) will sign a currency swap line with the Bank of England within a year, two at the most, enabling both banks to exchange a fixed amount of each other’s currencies to stabilise their own and improve liquidity. In time, London could even set up its own clearing bank for CNY.
There are plans for another CNY centre in Singapore but the Chinese authorities see this more as a regional hub. They want Hong Kong to partner with London so that they have first-mover advantage in Europe.
Another sign of China’s move to make RMB a global reserve currency is that, traditionally, CNH – the offshore version – has traded at a different FX rate to CNY due to heavy regulation in mainland China. But that regulation has now eased and the rates have converged.
The turning point of this convergence came when the PBOC widened the intra-day trading band on the onshore CNY exchange rate in April 2012.
The country’s leaders and the PBOC governor issued statements at the time on allowing the CNY to be traded more freely – a subtle message for a switch from a strong FX policy to a neutral or even slightly weaker one.
But meeting the government’s apparent deadline for RMB internationalisation is not going to be easy. CNY currently ranks 14th as a payments currency globally, with market share way behind the USD and EUR.
The biggest barrier is that the CNY is not yet fully convertible, but it is just two steps short of achieving that and three steps away from being an international currency.
Those steps involve the authorities:
• allowing all capital account items to be settled freely in CNY both ways – in and out of China;
• lifting all quotas and streamlining the application and approval processes; and
• increasing the use of CNY for international trade and investments.
This is a simplification of course as the last step in particular is huge, involves many different areas, and the definition of an international currency goes far beyond this description.
Logically, it would be reasonable to expect China to make the CNY fully convertible before embarking on the ultimate goal of internationalising the currency.
But China appears to have put “the horse before the cart” by creating an offshore market to promote the currency’s use in international trade and investments first. And this offshore trade has taken the lead over the onshore market.
Again, the authorities clearly have a timeframe in mind.
China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound.
But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.