Strategists observing China’s growing clout in global financial markets are building an increasingly weighty case for the internationalisation of the renminbi as a reserve currency. But distant foreign countries such as the UK are also keen to grab a slice of the action.
According to David Bloom, head of foreign exchange research at HSBC Bank, internationalisation must remain the key focus of the Chinese authorities’ currency policy.
China is the world’s largest exporter and manufacturer. According to HSBC figures, it represents 13.6 per cent of the world’s GDP and 10.6 per cent of global exports. The IMF expects this to rise to 17 per cent by 2020. Yet the renminbi’s turnover in the global foreign exchange market is a mere 0.4 per cent and its share in international debt securities is just 0.1 per cent. Mr Bloom believes this aspiring currency currently punches well below its weight in global trade and capital markets, with an imminent correction triggering both opportunities and challenges.
“Renminbi internationalisation is a three-stage process,” he says, detailing its gradual expected metamorphosis through the stages of a global trading currency, then a global investment currency, before achieving the ultimate goal of “reserve” currency.
By achieving initial recognition in trade circles, businesses outside China can grow accustomed to using it as a means of payment for goods and services. The second stage involves permitting enterprises and individuals to move renminbi holdings cross-border, requiring new regulations to ensure wider circulation, so that foreign investors become comfortable holding renminbi-denominated bank accounts and assets.
While this second phase of the renminbi plan is already underway, with Hong Kong at the centre as an offshore hub for investment products, there is little consensus on how to achieve the ultimate goal. According to Hongbin Qu, chief economist, Greater China, at HSBC Bank, full convertibility and breaking down of currency controls must be a pre-requisite. “While the capital account is more open than most people believe, China still has capital controls like all emerging markets,” he says.
One part of the officially-encouraged liberalisation has been the sanctioning of London as an offshore renminbi trading centre, to boost business through Hong Kong, with a recent accord signed between UK chancellor George Osborne and Chinese vice premier Wang Qishan. “While Hong Kong and Singapore are regional hubs, they are not global hubs. London is playing a key role in internationalising the renminbi,” says Sir David Brewer, chairman of the China Britain Business Council.
London’s politicians and financiers are currently in a long-term squabble with their continental counterparts, with the fear that current low levels of trade between the UK and China can be easily eclipsed by their more forward-looking European neighbours. They are encouraged by a ten-fold growth in London’s renminibi trading volumes during the 18 months to the end of 2011.
There is a belief, obviously encouraged by UK authorities, that London’s experience in product innovation and regulating complex strategies will help boost volumes of renminbi purchases, although better planning of possible expansion is also a priority.
“London is a premier trading centre, with experience of launching other markets and currencies,” says Chris Cummings, chief executive of promotional body TheCityUK.
UK government officials see a clear opportunity to exploit Chinese policy in order to draw up a sales pitch for their own capital city. “This initiative will help foreign exchange and help China access various financial products and services,” says Creon Butler, a senior adviser to HM Treasury in London. “All of the services which China needs are already available in London. The city can offer it depth, breadth and innovation.”
Making sense of the offshore RMB
Several of China’s trading partners are vouching for the offshore renminbi, with a third currency, such as the US dollar, creating unnecessary costs for both parties.
Remitting renminbi into China also eliminates delays in funding caused by onshore foreign currency conversion procedures.
Chinese businesses will increasingly expect their foreign counterparties to deal in renminbi and an offshore derivatives and capital market will have to provide a full range of funding and hedging tools, believes Linklaters’ partner Nigel Pridmore. “Financing costs in the offshore renminbi market are currently very attractive,” he says.
