In the past four decades, after its Reform and Opening up Policy, China has depended heavily on international trading to boost its gigantic economy. Whenever an economic crisis is looming, policymakers frequently look at options that may support exports to encourage domestic supply and demand. The Chinese economic miracle was primarily built upon an exports-oriented strategy.
In most trades, however, payments are not made in the country’s official currency, the renminbi, but rather in other major currencies such as the dollar, the yen or the pound. Even when the IMF decided to, this October, include the renminbi in its Special Drawing Rights (SDR), a unit of account defined by the IMF and whose value is based upon a basket of key international currencies, the renminbi’s role in world payments currency is still mostly limited.
Breathing Down The Greenback’s Neck
For example, the renminbi only accounts for 12.7% of all cross-border payments done with China and Hong Kong, while the dollar outweighs the renminbi, accounting for a whopping 63.6% according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The number is not surprising. China’s position as the world factory is facing fierce competition from local plants in Vietnam and Cambodia, where global companies can find cheaper labour, less regulation and lower environmental costs. The ageing population also limits China’s ability to keep exploiting its demographic dividend.
Therefore, China must find new ways to support its economic growth. Products and services traditionally traded with China are now shifting from low-cost, low-end to high-cost, high-end – semiconductors, military weapons and pharmaceuticals. In the latter case, China’s trading partners such as the US, Japan and Europe frequently have a heavier say in the trading negotiations since they have more and better sources of high-cost and high-end products and services. Consequently, it is a formidable job for China to persuade its trading partners to use renminbi when operating payments.
The West’s long-time suspicion of the communist regime also kerbs Beijing’s ambition to promote the renminbi. The uncertainty of domestic political stability, the low efficiency, the bureaucracy and the immaturity of the financial system all limit market confidence in China and restrict the renminbi’s broader use. The slowing economic growth and demand in China add no boost either.
However, good news should not pass unnoticed. The renminbi overtook six currencies, including the Swiss franc and the Australian dollar in the past three years and is currently the number six world payments currency with a share of 1.72% in global payments by value. Offshore renminbi clearing centres, banking institutions officially appointed by the Chinese central bank, the People’s Bank of China (PBOC) that handle clearing and settlement of renminbi payments, have steadily increased in the past three years, covering all major continents. Interestingly, there is still no offshore clearing centre in the US, partly due to the dollar’s powerful position as the world dominant currency in all aspects and the Fed’s strict regulations regarding the establishment of offshore financial centres. Whether there would be more cooperation and less criticism between the Fed and PBOC is crucial for the next step of the renminbi’s internationalisation. When a new monetary force is seeking to expand its influence on a global level, the old winner will by no means stand by and do nothing.
The UK is the key driving force behind the renminbi’s overseas adoption. One of the biggest banks in the world by total assets, China Construction Bank, has established an offshore renminbi clearing centre in London as early as June 2014, the earliest one outside the Asia Pacific region.
Chart 1. Timeline of Offshore renminbi Clearing Centres
London has just taken over Singapore as the number one offshore renminbi clearing centre excluding Hong Kong, with an increase of 7% in renminbi payments by value compared to last year, when nearly all other partners saw significant decreases.
Chart 2. Change in renminbi payments in economies with renminbi clearing centres
Part of the reasons behind this incredible increase is the strengthening relationship between China and the United Kingdom in terms of economic cooperation. Former Chancellor George Osborne described the period as a “Golden Decade” between the two countries. But how the shake-up in British politics after the surprising result of the referendum will affect Downing Street’s policy focus, and whether the economic and political legacies left by Cameron and Osborne will continue to survive will test London’s position as the most important offshore renminbi financial centre outside China and Hong Kong, as well as China’s ultimate target, the renminbi internationalisation.