When China’s State Council announced in March 2009 its intention that Shanghai will be an international financial centre by 2020, it barely merited media coverage in China. Abroad, however, it sent a signal that Beijing had set an implicit deadline for the liberalisation of its currency that the West has long been clamouring for.
Editor's choice
This belief was supported by the slew of policy decisions and regulatory changes that occurred around the same time. In December 2008, the State Council had begun pilot schemes to enable five Chinese cities to settle trade payments with Association of South-east Asian Nations members in renminbi. In 2010, that pilot was expanded to 20 provinces in China and some international companies. In August 2011, the Chinese central bank extended the scheme to include all areas in China.
Renminbi settlement rates are continuing to rise, even given volatility in the global economy. “The use of the renminbi for trade settlements has been increasing at a reasonable pace over the past few years; there’s no question that will continue,” says Andy Rothman, China macro strategist at brokerage firm CLSA.
There have been other supportive policy moves, such as the establishment of currency swaps with many other countries – including Latin America and Africa as well as Asia.
Dim sum presence
Similarly, offshore renminbi bond issuance in Hong Kong (the dim sum market) has taken off. Launched in 2007, the dim sum market really kick-started in the middle of 2010 when Beijing lifted certain restrictions and made it feasible for a wider range of institutions to issue bonds. In 2009, the market consisted of eight issues totalling Rmb16bn ($2.5bn). In the first 11 months of 2011, there had been 250 issues valued at more than Rmb140bn (including the first ever Basel III-compliant deal in Asia – a 10-year non-core 5 at 6% from ICBC Asia), according to data from HSBC.
All of these developments are seen as real strides towards full renminbi convertibility. But how much further Beijing will allow currency liberalisation to go in the current climate is unclear.
At least part of the explanation can be found in China’s slowing economy. Growth has replaced inflation as Beijing’s top policy concern, with policy-makers blaming the sovereign debt crisis in Europe for a slowdown at the country’s manufacturers. The HSBC Purchasing Managers’ Index fell to a low of 47.7 in November, indicating a retraction in the domestic manufacturing sector for the first time in 32 months.
While other countries may pray for a trade surplus to match China’s $14.5bn in November, it has dropped 36% since October 2010, according to data from the country’s General Administration of Customs, and the ratio of trade surplus to gross domestic product is expected to fall below 3% for the year.
The deepening woes for Chinese exporters had fuelled expectations that, in the short term at least, policy-makers in Beijing will soon halt the slow appreciation of the renminbi that they have allowed in the past three years. At the annual three-day Central Economic Work Conference for top Communist Party officials in December, which sets policy for the coming year, leaders clearly signalled that they are concerned about growth and would focus on doing as much as possible to support struggling exporters.
Rise in value
However, most believe that the continued internationalisation, and the rise in value, of the currency is inevitable. They argue that Beijing’s end-game is for the renminbi to rival the dollar.
“[The Chinese government's] goal is to create a reserve currency,” says Philip Poole, global head of macro and investment strategy at HSBC. “It sees the benefits of creating a reserve currency… Look at the US’s ability to continue issuing Treasuries irrespective of downgrades or political shenanigans that are failing to address [its] underlying problems. A large part of that relates to the fact it has the world’s reserve currency.”
Shanghai-based Mr Rothman does not agree that this is the plan, however; at least not in the near future. For one thing, he argues, reserve currencies have generally been around for a long time and are based in countries where there is the rule of law, banks are privately owned and the market sets rates and bond yields.
“None of those conditions applies in China and that is unlikely to change in the near future,” he says. “I’ve never heard a senior Chinese official say the government’s ultimate goal is to make the renminbi a reserve currency. They do talk about internationalisation, but that’s not necessarily the same thing.”
