The renminbi’s (RMB’s) long march towards becoming a global currency has just received a major fillip: the State Council has decided to proceed with a plan to make the currency convertible on the capital account, in addition to proposing interest rate reforms and allowing individuals to invest offshore.
These steps cement Beijing’s commitment towards making the RMB an internationally accepted reserve currency and confirm that the endgame is getting nearer.
Given the already rapid take-up of the currency in locations as far apart as Hong Kong, London, Singapore, Taipei, Paris, New York and Sydney, it’s hard to believe that it has been barely three years since China allowed companies anywhere in the world to settle their international trade in RMB.
In 2010, Beijing embarked upon its ambitious programme to make the RMB an international currency, rivalling the clout of the US dollar and the euro, and reflecting its own heft in global trade.
Standard Chartered’s Renminbi Globalisation Index (RGI) shows that the international use of the currency has soared ten-fold since we started tracking it in December 2010.
As of the first quarter of 2013, around 14 per cent of China’s total trade in goods and services was settled in RMB, up from less than 8 per cent at the end of 2011. While this is impressive, it also reveals the tremendous scope for further internationalisation of the currency. According to SWIFT data, the RMB is the world’s 13th most-used international currency, accounting for 0.8 per cent of all global cross-border payments. In comparison, the euro and US dollar together account for almost 75 per cent of all SWIFT payments.
RMB internationalisation is an irreversible process
Reflecting its growing stature, the RMB is being used increasingly by global investors and businesses as a currency for storing wealth and for raising capital. By the end of May, outstanding amounts of offshore RMB certificates of deposit and so-called Dim Sum bonds – RMB-denominated bonds issued offshore – totalled over RMB480 billion or almost 70 per cent of Hong Kong’s total RMB deposit base.
The latest RGI reading adds conviction to our view that RMB internationalisation is an irreversible process that will accelerate further in 2013. Governments across Asia, Europe, the Americas and Africa want to encourage the development of offshore RMB centres in their financial capitals. They see it as critical to future trade with China, which is expected to emerge as the world’s largest economy by the end of this decade. And they are taking policy measures to facilitate this development.
“European multinationals have embraced the RMB amid rising euro-area uncertainty”
Within Asia, Singapore is in a strong position to capture the structural rise in flows between China and the Association of South East Asian Nations (ASEAN) – which we see as the catalyst for the next wave of RMB conversion – much like London has benefited as European multinationals have embraced the RMB amid rising euro-area uncertainty.
In May, Standard Chartered issued the first ever Dim Sum bond listed, cleared and settled in Singapore – right after the city’s RMB clearing services went live. Singapore’s new RMB clearing capabilities will raise awareness among ASEAN companies of the benefits of RMB over US dollar invoicing.
RMB deposits in Hong Kong will reach RMB750 this year
London has signed a RMB200 billion currency swap arrangement with China, providing reassurance that enough RMB liquidity will be made available in the local market, if and when needed. Australia is also supporting the RMB by committing to invest 5 per cent of its reserves in China’s sovereign bonds. Meanwhile, Hong Kong’s recent removal of regulatory impediments will boost its offshore RMB liquidity. We expect RMB deposits in Hong Kong to increase to around RMB750 billion by the end of the year.
Taiwan too is catching up fast, as the use of the RMB for cross-border trade settlement by local businesses soars. In February, Taipei became the fourth-largest offshore centre for RMB settlement, behind Hong Kong, London and Singapore, up from seventh place in August 2012. RMB payments accounted for 12 per cent of Taiwan’s bilateral trade with mainland China in March 2013. This compares with 6 per cent in August 2012, when Taiwan first allowed such trade to be settled in RMB via offshore banking units.
“Are companies and investors ready to capitalise on one of the biggest shifts in the financial markets this century?”
The next leg of the RMB’s international march will possibly be led by international investment, as Beijing continues to encourage two-way capital flows. This complements the recent news that 13 multinational corporations are now allowed to move funds worth up to 30 per cent of their invested capital in China across the border.
For Beijing, this has never been a one-sided business, as internationalising a currency involves more than pushing money offshore; rather, the intent is to create a deeper pool of offshore RMB liquidity.
Next step in the RMB’s long march overseas
The expansion of the Renminbi Qualified Foreign Institutional Investor scheme (RQFII) – a quota allowing overseas institutional investors access to China’s financial market – creates more RMB-denominated investible assets offshore. It exemplifies China’s experimentation model for capital account liberalisation: opening new avenues and, over time, granting larger quotas, expanding eligibility thresholds, and widening the accessibility of various onshore markets.
Expanding RQFII eligibility beyond asset management licence holders in Hong Kong to Taiwan’s financial institutions could be the next natural step in the RMB’s long march overseas. Other global financial centres would be next in line. Are companies and investors ready to capitalise on one of the biggest shifts in the financial markets this century?
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