The momentum to
internationalise the renminbi is building up. Wendy Guo and Samuel Lum review
the milestones and challenges of renminbi internationalisation.
What
does it take to become an international currency?
An
international currency is widely held outside the issuing country and used in
transactions not just between nationals and non-nationals, but also between
non-nationals. It is a unit of account for invoicing trade, denominating
financial transactions and currency pegging. It is a medium of exchange for
settlement of transactions, for foreign exchange intervention and central bank
swaps. It is also a store of value used for currency substitution, cross-border
investment and central bank reserves.
What
will China gain from internationalising the renminbi?
A
challenge facing China’s policymakers is the capital preservation of its vast
foreign exchange reserves, of which some 60 per cent are in US
dollar-denominated assets. An internationalised renminbi serving
as a reserve currency could help China reduce its US dollar exposure.
It
could also help China reduce the implicit “seigniorage” charge it pays to the
US, given the US dollar’s privileged status as the leading international reserve
currency. Other benefits include reducing foreign exchange risk for Chinese
businesses and improving funding efficiency of financial institutions.
What
are the main impediments to internationalising the renminbi?
The
main impediments include inadequate breadth of the Chinese financial system and
limited competition among its financial institutions. China’s capital markets
to a large degree remain closed to foreign investors given the relatively small
size of the Qualified Foreign Institutional Investor (QFII) and related
schemes. It appears unlikely that the Chinese government will give up control
of its capital account in the foreseeable future. While full currency
convertibility and capital account liberalisation are not prerequisites for
internationalisation, more liberalisation is needed for progress to be made.
How
far is the renminbi along the road to internationalisation?
China
has been a significant fund supplier in bilateral swap agreements that use the
renminbi as their currency vehicle under the Ching Mai Initiative. This is a
multilateral arrangement established in 2000 among the Association of Southeast
Asian nations (Asean) Plus Three countries to provide short-term liquidity to
member central banks to counter currency speculation and avoid a repeat of the
1997 Asian financial crisis.
In
2004, more than 30 banks in Hong Kong started offering renminbi deposit-taking,
remittances and currency exchange services. In 2007, offshore
renminbi-denominated bonds, also known as “dimsum” bonds, were first issued in
Hong Kong. In the autumn of 2012, renminbi currency futures trading will start
in Hong Kong.
Central
banks including Malaysia, Nigeria, Chile, Thailand, Brazil and Venezuela, have
started to include renminbi in their reserve portfolios. Recently, the quota
for the Hong Kong Monetary Authority to invest its reserves in China’s
interbank market was doubled. Renminbi internationalisation has progressed to
encompass all dimensions from trade invoicing and settlement to investment
products to central bank reserves.
What
are the challenges and the next steps?
Given
the size of China’s economy and international trade, rapid increases in the
international use of renminbi in trade invoicing and settlement is almost
assured though the volume is still minuscule compared with those of the other
main world currencies and fees are still relatively high. However, the
renminbi’s allocation in central bank reserve portfolios remains insignificant.
One of
the Chinese government’s objectives is building up the service infrastructure
and renminbi-denominated investment products offered via offshore renminbi
centres. China’s commitment to the development of Hong Kong as a key offshore
renminbi centre has been enshrined in China’s 12th Five-Year Plan. Offshore
renminbi centres, which include London and Singapore, play a critical role as a
“firewall” prior to the full liberalisation of the capital markets, exchange
rate and capital account in China.
Longer
term, renminbi internationalisation and China’s strategic interest in various
Asean countries may strengthen economic ties and could shape a de facto
renminbi currency bloc among the Asean and Greater China countries. Optimistic
analysts have predicted sizable use of the renminbi in trade globally and full
convertibility in about five years.
Wendy Guo and Samuel Lum
Wendy
Guo is head, education and Samuel Lum is director, private wealth and capital
markets at CFA Institute’s Asia Pacific Office
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