Next month marks five years since China launched the renminbi (RMB) on its unstoppable global ascent with the opening of the offshore RMB market (CNH) in Hong Kong.
Today, few companies or investors can afford to ignore China, or avoid dealing in RMB.
Our Renminbi Globalisation Index (RGI) – which tracks the internationalisation of the RMB across markets – has risen more than 21-fold since December 2010, underscoring the overwhelming response to the RMB around the world.
Almost a quarter of China’s total goods trade is now invoiced in RMB
People’s Bank of China (PBoC) swap lines, offshore RMB clearing banks and Renminbi Qualified Foreign Institutional Investor (RQFII) quotas span the globe. Most recently, Chile was granted all three by China, and Brazil, Russia and Indonesia are among the candidates to host new RMB clearing banks, in our view.
Almost a quarter of China’s total goods trade is now invoiced in RMB. More than 500 foreign companies and institutions have access to China’s onshore bond market, and we estimate that official reserve holdings of renminbi assets have reached USD 70-120 billion, representing around 0.6-1.0 per cent of global foreign exchange reserves.
Crucial IMF move
The RMB has become so global that – in our view – it now meets the technical requirements for inclusion in the International Monetary Fund’s Special Drawing Rights (SDR) basket.
We assign a 60 per cent probability to SDR inclusion happening later this year, giving the RMB much-deserved recognition as a global reserve currency and driving diversification of global investments into RMB assets.
Strong policy momentum
And the next five years? We expect big things for the Chinese currency. Backed by a strong policy momentum, further capital account liberalisation should result in ‘managed convertibility’ for China by 2018. While some safeguards will remain in place, only short-term speculative flows are likely to be tightly controlled.
By 2020, we expect almost half of China’s goods trade to be invoiced in RMB, while offshore deposits could have reached CNY6 trillion, up from CNY1.8 trillion. Inflows to the onshore bond market could total up to CNY4.5 trillion in five years’ time, even if the IMF delays the RMB’s SDR inclusion.
A more accessible RMB opens up important new opportunities for investors and companies
We believe that China’s government bonds will be included in major emerging-market bond indices within two years. Beijing is also likely to give market forces a bigger role in driving RMB foreign exchange trade: we expect the onshore USD-CNY trading band to widen to +/-5% by end-2017, from +/-2% now.
The importance of the PBoC’s daily fixing – the mid-point reference rate set by the PBoC for the USD-CNY spot trading range — is likely to be much diminished by 2018. This, together with the need to prepare for more USD-CNY volatility, means that companies will have a powerful incentive to explore and use different hedging tools in the deliverable markets.
Given China’s important role in the global economy, a more accessible RMB opens up important new opportunities for investors and companies. While there will be pitfalls, such as a more volatile exchange rate, we believe onshore financial reform and a deepening CNH market will give offshore users the means to manage such risks.
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