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A Look At Renminbi-isation

 4 min read / 

As the world’s second largest economy, one would expect China’s currency, the renminbi (RMB), to exert a large amount of influence – something it historically has not. However, with trends of liberalization underway in the Mainland, will the currency take up the mantle as the world’s reserve currency?

Renminbi-isation is the increasing usage of the currency in routine-payments, investments and reserves on an international scale. Such a term has sparked recent hype, following further Chinese commitment to liberalisation, which many see as the road to becoming the world’s reserve currency. Currently, the dollar has the “exorbitant privilege” of being number one, but this is being questioned out loud by United States (US) officials.

Such questions, however, are not found in their Chinese counterparts, who are enticed by the benefits the privilege brings. Importantly, being the world’s reserve currency allows deficits, in the long run, to be funded via cheap, foreign inflows (enabling Chinese expansion at faster rates). In China’s case, another benefit will be the ability to generate higher returns on its net foreign assets, which are largely invested in dollar-denominated debt instruments (due to the weakness of the RMB internationally).

Based on the theme of “macroprudential management”, RMB-liberalisation will remain within the strict control of the Chinese government. Whilst this contrasts the mid-20th Century Eurodollar explosion (based on opportunistic market-building), it will allow China to avoid the mistakes of other nations – important when considering the potential scale of operations.

Indeed, the impact of such ‘guided’ liberalisation can be seen through the growing use of the RMB as a reserve currency. For example, the Reserve Bank of Australia recently began to divest more of its reserves into RMB (though this partly reflects the preeminence of China as the country’s largest trading partner). However, it would be shallow to only consider the growth of the RMB as a reserve currency, as Renminbi-isation has lead to strong growth in capital markets, following the advancement of ‘dim sum’ bonds (non-Chinese bonds issued in RMB).

Another aspect of Renminbi-isation is the increase in global transactions using the currency, which the Institute of International Finance reports to have more than doubled over the past year, leading to benefits to investors and businesses alike. As Jiongdong Hau, of the International Finance Corporation, projects, this leads to a deeper, more liquid market, increasing opportunities. This also allows diversification from the risks of the dollar, which gives agents more choice in their strategies, boosting market efficiency.

However, not everybody is convinced; notably, UK companies have been slow to adopt the currency in international transactions, highlighting concerns over its future. On a larger scale though, some see recent liberalisation-trends as only face value changes. Indeed, real liberalisation (i.e. a floating currency) is not going to happen, as the RMB would likely appreciate, and wipe out Chinese exporters (something in China’s mind following the growth of Vietnam and Cambodia). Further, the promotion of state-owned banks means the capital market, whilst developing, remains illiquid. As Dr John Lee writes, until hard evidence of reform in the above is seen, the RMB is far from becoming the world’s reserve currency.

In the meantime, policies attached to the move towards the “exorbitant privilege” should be welcomed, as they are leading to concrete benefits for all parties. This is especially true when considering the position of the US in welcoming such changes – at least for now. In the end, the growth of the RMB should be expected following the position of China in the world; the only question is whether this growth will lead to confidence in it as a store of value – something that is not guaranteed.

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