‘Will renminbi internationalisation fail?’ and ‘What if China grinds everything to a halt?’ These were questions put to me by clients during my recent roadshow in Europe.
In contrast to the upbeat spirit in the past few years, recent news about the Chinese economy have focused on its departure from high-speed growth, the issue of shadow banking, and huge local government debts.
Nothing should be taken for granted after global financial crisis that sent shockwaves around the world in 2008, and it’s understandable that those far removed from the centre of the action should be concerned about the future of renminbi (RMB).
“RMB is on an irreversible journey of internationalisation. The only question is the speed of travel, not the direction”
However, it is important to keep things in perspective. There should be no doubt now that the RMB is on an irreversible journey of internationalisation. The only question is the speed of travel, not the direction.
Why? Because China’s leadership is determined to make it happen. Political push is one of the four key elements needed to internationalise a currency – along with deep financial markets, a sizeable economy and a sustainable growth trajectory – and, if you look closely, China does meet each of these.
Resolute political will
Beijing has exerted unwavering and resolute political will to carry out financial reform for the USD9.1 trillion economy. Over the past decade, we have witnessed the complete opening up of RMB trade settlement, the introduction of RMB clearing services to four cities worldwide, the establishment of 24 RMB swap lines with the central banks of other countries, and the proliferation of offshore RMB-denominated bond markets.
The list keeps getting longer, with the latest additions being the inception of the pilot free trade zone in Shanghai, the widening of the RMB trading band, the abolishment of the lending rate, and the Shanghai-Hong Kong Stock Connect share-trading programme.
To say that these policy changes have come about faster than expected is a vast understatement, and the response from around the world has been overwhelming.
Cities from New York and Toronto to Paris and Frankfurt have all expressed an interest in becoming the next RMB offshore centre, at least 40 central banks have invested in RMB and several others are preparing to do so. With so many countries trying to get on the bandwagon, RMB internationalisation cannot go wrong.
China’s financial markets have grown substantially wider and deeper in the last decade. As of the end of 2013, China’s A-share market capitalisation reached RMB23.9 trillion, and the bond market RMB29.9 trillion. It’s also important to take into account Hong Kong, a de facto proxy to China’s financial market, where the majority of dim sum bonds, worth a total of RMB291 billion, were issued in 2013.
RMB now ninth most traded currency globally
Moreover, the daily trading volume of onshore and offshore RMB foreign exchange – including spot, swap, forward and options – nearly quadrupled to USD120 billion between 2010 and 2013, making RMB the ninth most actively traded currency globally.
The latest cross-border stock-dealing initiative also opens up new doors for international investors to buy Shanghai-listed shares via Hong Kong, and Chinese investors to tap into Hong Kong-listed shares.
“Even if China’s growth slows, we would at most see stagnant or slower progress in RMB liberalisation, not a complete halt”
Over the past decade, China has quickly risen to the rank of the second-largest economy in the world, and it is on course to overtake the US, though whether it will sustain its growth trajectory is uncertain.
In the first quarter of 2014, China’s economy was still expanding well within the government’s expectation, albeit at a slower rate of 7.4 per cent. This supports the view that the economy is slowing, not collapsing, as China strives to sustain growth without running the risk of over-investing and -lending.
Even if China’s growth slows, we would at most see stagnant or slower progress in RMB liberalisation, not a complete halt.
More significant measures should be expected
Take the example of Japan: the yen lost momentum as a global currency following the 1997 Asian financial crisis, but a significant proportion of Japanese trade is still settled in yen and, at USD5.96 trillion, the Japanese economy is too big to be ignored by global trading partners.
China is almost double the size of Japan in terms of GDP, but so far only 17 per cent of its trade is settled in RMB, showing the tremendous potential ahead.
China has come a long way in the opening up of its capital account, but this is only the beginning, and more significant measures should be expected.
The internationalisation of the RMB has been set in motion, and all the evidence show that it has passed the point of no return. So while concerns are understandable, corporates can be confident in jumping on board.
A version of this article appeared in the South China Morning Post on 7 May 2014