The internationalisation of the renminbi has been gathering momentum for some time now, but 2012 proved to be an exceptionally impressive year for its growth. According to payments system Swift, the value of payments using renminbi grew by 171% during the course of the year and in February 2013 overtook the New Zealand dollar and the Russian rouble to become the 13th most used currency, accounting for 0.63% of all global payments, a significant jump from January 2012 when it ranked 20th and accounted for 0.25%.
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Of the 160 countries that exchanged payments with China and Hong Kong in April 2013, 47 of them had at least 10% of their payments valued in renminbi.
“Renminbi internationalisation is a policy target of the Chinese government,” says Jonathan Anderson, president of Emerging Advisors Group, a China-based emerging market macro consultancy that services the global fund management and financial industries. “The country's central bank has been very vocal about this and has come out with quite explicit statements saying that it wants to make the renminbi a reserve currency.”
Parts in place
Further to this, the Chinese government has been working hard to put in place some key aspects of financial infrastructure to enable the renminbi to become a truly global currency for trading purposes, with some important milestones having been reached in the development of offshore renminbi.
Most notably, the mainland designated enterprises requirements were replaced with a watchlist system in 2012, which means that effectively all businesses in the mainland are eligible to settle trade in renminbi for the import and export of goods and services. In the offshore market, the product range for renminbi trade services, receivable finance and telegraphic transfers is the same for foreign currency products. Efforts such as these have helped to provide a significant boost to trade deals being conducted in renminbi.
“The share of China’s trade that is denominated in renminbi has grown significantly in recent years, and that’s been the primary objective of government policy,” says Andy Rothman, China strategist at Chinese-owned broker CLSA. “It’s gone from almost nothing to roughly 10% in a relatively short number of years.”
Indeed, in 2012, total renminbi trade settlement reached Rmb2940bn ($480.5bn), 41% higher than in 2011, while in the first half of 2013 about 11% of China’s overall foreign trade of goods was settled in renminbi.
“We now have more than 10% of China’s trade being paid for in the renminbi, which is a pretty impressive figure given that China has the highest trade volumes of any country in the world,” says Mr Anderson. “It has also made a concerted effort to open up new offshore renminbi markets in Hong Kong, London and Singapore. All of these markets can now issue bonds, hold deposits and their market size is somewhere in the region of hundreds of billions of dollars.”
Outside help
Indeed, while China has been ushering through new reforms, there have also been encouraging regulatory developments in other jurisdictions, most notably Hong Kong, that are helping to advance the internationalisation of the renminbi.
Already the leading offshore renminbi hub, Hong Kong has introduced several measures that are aimed at cementing its position. In May 2012, the Hong Kong Monetary Authority (HKMA) announced that it was removing the mandatory limit of 20% on renminbi net open positions and would instead allow banks to determine their own limits. The HKMA also removed the minimum liquidity ratio of 25% for offshore renminbi – a move aimed at releasing more offshore renminbi into the interbank system, which will improve the currency’s liquidity.
Such developments are hugely important, as the pace of the renminbi's internationalisation depends to a large degree on the depth of liquidity in the offshore market. Indeed, the People’s Bank of China (PBOC) has added a number of new currency swap agreements with central banks across the world as part of its efforts to encourage more international companies to accept renminbi in trade settlement.
Most recently, in June 2013, China and the UK signed a three-year currency swap deal with a maximum value of Rmb200bn. To date, the PBOC has signed nearly Rmb2000bn-worth of currency swap deals with some 20 countries and regions, including Hong Kong.
Chinese authorities have also introduced a range of measures over the past 18 months as part of a broader effort to encourage greater international participation in Chinese financial markets. They are well aware that improving international access to domestic capital markets is key. In July 2013, HSBC received approval from mainland Chinese regulators to invest renminbi onshore, the latest step in the opening up of China’s financial markets to overseas funds.
Steps remain
Clearly, all of this bodes very well for spurring on the future growth of the renminbi. But while significant progress has been made, there are still huge steps that need to be taken if China is serious about committing to the internationalisation process and the prospect of the renminbi ever becoming a reserve currency.
“As long as the capital account continues to be relatively tightly controlled, as long as all the significant financial institutions are controlled by the state, and as long as the state continues to set all the key exchange rates, then how can it possibly become a global reserve currency?” says Mr Rothman.
Industry observers are quick to point out that a key factor in determining the pace of the renminbi’s development internationally is the Chinese regulators’ willingness to relax controls over the currency. The Chinese authorities are fully aware of this, especially of the need to implement procedures that will help in achieving greater renminbi convertibility for capital accounts.
“If 2011 and 2012 were the years when the debate over foreign exchange, interest rate and capital account liberalisation took shape in China, then 2013 appears to be the year that meaningful plans are being put in place,” says Simon Derrick, chief currency strategist at BNY Mellon. “We have argued for some time now that 2013/14 could prove watershed years for Chinese currency policy. Remarkably, there is growing evidence that this might actually prove to be the case.”
This was best displayed at an executive meeting chaired by premier Li Keqiang in May 2013, when the state council stated that its strategy for 2013 included the following three main objectives: putting forward more reform initiatives to liberalise interest and exchange rates, working out an operational plan to make the renminbi fully convertible under capital accounts, and establishing a system that allows for outbound investment by individuals.
“Although the meeting shed little light on the details of how these reforms would be implemented, these proposals indicate that the central government is reform-minded in further internationalising the renminbi and has set out specific steps to realise this goal,” said Tiecheng Yang, foreign legal consultant at Clifford Chance in Beijing, in a report entitled New Developments Accelerate Renminbi Internationalisation that was published in July 2013. “These initiatives would require China to fundamentally restructure its system of capital controls and further open up its domestic financial markets,” he added.
Seeking acceptance
If China is serious about the renminbi becoming a top reserve currency, then the currency must be accepted across the world for investment, financing and payment purposes, and for this, renminbi convertibility will be the minimum requirement.
“Chinese policy-makers put renminbi capital convertibility as one of the top [priorities] of China's future development,” says Candy Ho, head of renminbi business development at HSBC. The bank has forecast full renminbi convertibility by 2017. “Already there is some initial progress, with some foreign central banks having announced that they have invested or will start investing in renminbi as part of their reserves,” adds Ms Ho.
While China is known for preferring to adopt a slow and steady approach to its currency reforms and internationalisation, the inevitability of a continued slower economic growth rate in China means that reform of all parts of the economic system are even more important today.
However, the objectives laid out by the state council in May 2013 are a clear testament to an ever-growing political will for the authorities to play an active and prudent role in the advancement of the renminbi as a global currency.
