China Presses on with Renminbi Internationalization

Over the past several decades, we view how China’s high financial growth and increasing financial integration with other countries possess led to a dramatic increase in its clout in global result and trade.

Just look at the facts. China is now the world’utes second largest economy, comprising 12 per cent of global gross domestic product in 2013. It is also the actual world’s largest exporter and second biggest importer, accounting for about 12 percent of world trade in 2013. Attracting more than US$110 billion in FDI in 2013, the PRC may be the world’s largest developing-country recipient of FDI inflows. It is also the world’s largest holder of foreign exchange reserves, having a total of US$3.8 trillion in reserves at the end of The year 2013.

The PRC may be a globally significant economic and trading power, however the market share of its currency, the renminbi (RMB), lags well behind the US buck and the euro.

To align the RMB with its growing global prominence, the PRC has embarked on the strategy to internationalise the RMB. Typically, it’s taking a gradual approach. In this, it has embarked on a number of initiatives designed to encourage the wider use of the RMB and raise its status in the international monetary program.

These measures include allowing foreign investors access to domestic capital markets, through programs such as the Qualified Foreign Institutional Investor and also the RMB Qualified Foreign Institutional Investor. It has also increased flexibility from the exchange rate — the RMB buying and selling band has been widened in order to plus or minus 2 per cent. Also, through the use of RMB as a settlement currency for cross-border trades, the PRC has been gradually growing the use of RMB in bilateral trade settlement agreements.

There are other steps being taken, such as the development of RMB down payment accounts and the opening from the offshore RMB market. The PRC has also opened offshore RMB centres, for example in Hong Kong, Singapore and London.

The outcome has been the emergence of the RMB in the international monetary system. For example, the RMB is beginning to play a role in international industry transactions. In December The year 2013, the RMB overtook the euro being the second most used forex in global trade finance after the US dollar. China’utes international trade has also grown at a compound annual growth rate of 19.1 percent between 2001 and The year 2013.

The rapid expansion of RMB trade negotiation together with other policy and regulating steps have bolstered the development of the RMB bond market in Hong Kong (also known as the dim amount bond market). From only 10 billion yuan (US$1.6 million) in 2007 — the year once the first dim sum relationship was issued — RMB-denominated bond issuance in Hong Kong significantly increased, to 372.1 billion yuan ($60.7 billion) within 2013. In the first 3 months of 2014, bond issuance reached 338.8 billion yuan ($55.2 billion).

The number of bond issuances has likewise rose steeply from just 5 in 2007 to 891 this year and 1,160 in 2013, while the number of relationship issuers increased from simply 3 in 2007 in order to 132 in 2013. From The month of january through May 2014, 890 bonds were issued by 107 issuers.

While the bulk of RMB bond issuances still originate from companies based in the PRC and Hong Kong, issuances from other economies also have grown through the years. In 2010, issuances through firms outside PRC and Hong Kong taken into account only 5.4 billion yuan ($880 million). By 2013, their RMB bond issuances amounted to Seventy six.1 billion yuan ($12.4 billion). As a share of total RMB bond issuance, their share offers varied from about 13–35 per cent.

Trade settlements have contributed to the rise of the RMB as a global currency. According to the Society with regard to Worldwide Interbank Financial Telecommunications (Quick), the RMB only had a Zero.31 per cent share in globe currency payments in 2011. Within March 2014, however, its reveal had increased to 1.Sixty two per cent. The RMB’s ranking in world currency repayments has also increased. In October This year, it was ranked 17th when it comes to usage but by March 2014, its ranking had now use 7th position. Indeed, the RMB is gaining on the Canadian dollar (which held the share of 1.83 per cent, ranking 6th) and the Aussie dollar (with a share of just one.84 per cent and Fifth in rank).

So while good progress has been made, there is lots of work still to be carried out. Trade settlements and bond issuance have increased, but from a reduced base. There have been some rest in restrictions on funds flows, but the capital account is still largely controlled. The actual exchange rate is still managed.

There is a positive trend in RMB as a reserve holding, but it’s still small compared to other global currencies. Financial markets are still less deep and liquid because those in developed countries, and are much less than those with global currencies. While the accomplishment is remarkable, the RMB is still far from being a full-fledged international currency.

The PRC is moving in the right direction with these measures and producing positive results. But these developments with the RMB are more a result of the PRC opening up its capital account and deepening its financial markets rather than the pursuit of specific policy objectives. All these trends will develop a critical mass over time and have the potential to start transforming the global financial system.

Renminbi stepping in right direction toward internationalisation is republished with permission from East Asian countries Forum