Renminbi internationalisation: the next phase

Over the past 12 months, the renminbi has continued its impressive march to global currency status. This progress has come despite a number of challenges, including a troubling first quarter of the year in which China’s annual economic growth rate hit an 18-month low, coupled with a widespread sell-off of the renminbi, as the People’s Bank of China apparently weakened the currency in response to perceived speculative activity. 

Yet, these difficulties have been overshadowed by various milestones that have driven the currency’s greater internationalisation. Earlier this year, the Hong Kong and Shanghai stock exchanges unveiled plans for a connectivity mechanism that will provide international investors with an opportunity to access companies listed in Shanghai. The trading link is expected to be operational by mid-October and will be important in China’s financial market reform. It will also go some way to facilitating the further internationalisation of the renminbi, while promoting the longer term convergence of the offshore and onshore currency markets.

Moreover, research from HSBC suggests that the success of the China (Shanghai) Pilot Free Trade Zone, launched in September 2013, is likely to encourage further deregulation of the onshore renminbi (CNY) market as the zone achieves a greater level of maturity. Over time, this has the potential to lead to free-trade zone-style regulatory structures being rolled out to other parts of the country.

Offshore growth

This comes as the market in offshore renminbi (CNH) continues to experience accelerated growth. In February this year, Singapore and London, the two largest offshore renminbi trading centres outside Hong Kong, signed a co-operation agreement to promote renminbi product and service innovation globally. Frances Faulds investigates the rise of these offshore clearing centres, particularly in Europe and North America, on page 152.

Outside Hong Kong, Singapore is the largest of these clearing centres, accounting for 6.8% of renminbi payments, overtaking London, which has a 5.9% share, to take the number two spot earlier this year, according to data from global payments network Swift. Meanwhile, on a country scale, the US assumed third position globally, jumping ahead of Taiwan in April with 2.6% of total renminbi payments, up from 1.3% in the previous year.

Alongside these developments, the renminbi’s growth as a trade settlement currency has also been significant. Today, it is the seventh most used global payment currency, accounting for 1.57% of global payments, according to figures from Swift. A notable trend in this development has been the role of European hubs in facilitating the renminbi’s internationalisation, with Europe now accounting for 10% of renminbi payments, by value, globally.

Meanwhile, the maturation of the renminbi offshore bond market has accelerated swiftly. Stefania Palma, The Banker’s Asia editor, explores on page 154 the increasing diversity and growth in this market, as international investors look to broaden their currency and investment exposure. Primary issuance in the dim-sum bond market reached record numbers in 2013, hitting CNH328bn ($53.2bn), according to figures from Bloomberg. For the first eight months of 2014, gross issuance had reached CNH428bn, with full-year forecasts pointing to between CNH550bn and CNH580bn in issuances.

Payments superhighway

Nevertheless, the renminbi’s recent advance has not been without setbacks. The Banker explores the prospects for the China International Payment Platform System (CIPS) on page 150, the implementation of which has been delayed. CIPS has been described as a renminbi payments superhighway, which will directly link international and domestic participants, reduce transaction processing costs, overcome certain language-based constraints and adopt global reporting standards.

At present, an existing mechanism known as the China National Advanced Payment System (CNAPS) clears all domestic renminbi payments; however, banks must have a settlement account with a branch of the People’s Bank of China. This system is widely regarded as being both costly and inefficient, and has, to some extent, hindered the renminbi’s ability to internationalise more effectively. Although it is unclear when CIPS will be introduced, it will likely be towards the end of 2016.

For China, and the renminbi, the next few years will be telling. As the process of currency liberalisation unfolds, some observers have suggested that by 2030 the ‘redback’ will sit alongside both the dollar and the euro as a global reserve currency. Based on its current trajectory, such an outcome seems more than likely.