The increasing importance of the renminbi in financing world trade was underlined this month by data that showed the use of the Chinese currency had outstripped that of the euro.
Statistics from the Society for Worldwide Interbank Financial Telecommunication, or Swift, showed the use of the renminbi in letters of credit and collections surged to 8.7 per cent of the market in October 2013, up from 1.9 per cent in January 2012. China was the biggest user of the renminbi in trade finance, followed by Hong Kong, Singapore, Germany and Australia.
Kathleen Brooks, research director of Forex.com, said the increased use of the renminbi was not really a surprise because China is the world’s second-largest economy and is central to global trade. That the renminbi is being used more and more for global trade is part of its internationalisation. However, it is “only one step towards full liberalisation of the Chinese currency”.
Wilfred Wee, a manager in Investec Asset Management’s emerging markets fixed income team, said the Swift system only captured a small part of global trade finance. He said the renminbi was being used increasingly outside Swift to settle trade. For example, the Chinese are working towards settling trade with Russia in renminbi rather than dollars, he said.
China has signed agreements with other countries to allow settlement in renminbi. These include a three-year currency swap line, worth Rmb200bn (£20bn), agreed in June between the Bank of England and the People’s Bank of China. The first such arrangement between China and a G7 country, it allows the central banks to swap currencies and enables companies to settle trade in renminbi rather than dollars.
In October, talks between UK chancellor George Osborne and his Chinese counterpart, vice-premier Ma Kai, resulted in an agreement that allows investors in the UK market to apply for a licence to invest renminbi directly into China under an extension of the renminbi qualified foreign institutional investor scheme to London. This has made London the first place outside greater China to have been granted a RQFII quota.
Brian Coulton, emerging markets strategist at Legal & General Investment Management, identified the development of the CNH market in Hong Kong as one of the catalysts for the impressive rise in the use of the renminbi. This offshore renminbi market for bank deposits and financial securities issued in Hong Kong has grown rapidly, particularly since the Chinese authorities relaxed restrictions on the market in 2010.
This market has benefited Chinese exporters by reducing their vulnerability to volatility in China’s exchange rate and has provided them with more investment options for renminbi, said Mr Coulton.
The eventual goal for the Chinese, said Mr Wee, is “more market-based determinants of both the currency and interest rates”. He has been surprised at the speed of change. “For us, the pace of announcements has been in general coming faster than anticipated,” he said.
Among measures taken by the Chinese authorities is the introduction of prime lending rates by banks and “negotiable certificates of deposits”, following the Third Plenum.
“The benefits of not being held hostage to other currencies, of being able to manage their own currency directly, is something the Chinese want to promote,” commented Mr Wee. He added, however, that the Chinese had not opened the floodgates. “They have been swift in making micro changes, but these are still small steps. Ultimately they still have the quota system in place to limit foreign investment allowed into the country,” he said.
Ms Brooks said the Chinese authorities would decide the timing of free trade in the currency. As trade settlement in the renminbi has grown, China has become more content to allow the renminbi to appreciate on a daily basis at a steady pace, she said. But for advisers, finding ways to tap into the investment potential of the renminbi’s rise was “not as straightforward”, she said.
The growing importance of China and the renminbi in the world economy raises the question of whether, ultimately, the renminbi could overtake the dollar as the world’s primary currency for transactions and even for central bank reserves.
The World Gold Council noted in a March 2013 report on central bank diversification strategies: “Despite limited availability and convertibility of its currency, China’s rise in the global economy has forced central banks to seriously consider renminbi-denominated assets.”
Some are sceptical. Mr Wee expects the renminbi to become “a very major currency” by 2020 and possibly the second most used currency. But to overtake the dollar as the world’s foremost transaction and reserve currency would require several prerequisites, including open capital markets and full convertibility of the renminbi.
Mr Coulton agreed the renminbi was going to become more important. But for it to replace the dollar, given the greenback’s dominance of the global securities market, was a separate issue. “I do not foresee that in five, 10, 15 or 20 years,” he said.
Opening up the capital market would create “potential instability and volatility”, he said. “It is not a risk the Chinese need to take at the moment.”
Ms Brooks agreed that the Chinese authorities want to avoid the “huge imbalances” that would be created by full liberalisation of financial systems. The renminbi’s use in financing global trade is increasing, but it is “a step forward on a very long path,” she said.
Alison Warner is a freelance journalist
