February 2013

Why RMB will be a global currency by 2015

Use of Chinas renminbi is increasing rapidly despite the countrys slowing economy and the time is now for the new leadership to push it as a major international currency. John McCormick, CEO, Markets & International Banking and Chairman, RBS Group, APAC, explains.

Financial crises in the US and Europe mean theworld needs a new, more stable global reserve currency, and trade in RMB is growingrapidly. In the FX market, for example, our figures show that volumes are now worth around USD5-6 billion daily double what they were a year ago. A number of factors suggest that the Chineseauthorities want to make RMB internationalisation happen by 2015. First, the International Monetary Fund is reviewing its special drawing rights basket, which uses four key international currencies tosupplement member countries official reserves and bolster liquidity. The deadline for completing that review is 2015. Based on where we see the G7 countries today, we believe theres a very strong chance that China can get the onshore version of RMB, CNY, into that basket a real boost to the currency on the world stage. Also, the Shanghai Municipal Government hasset a goal of making the city the global pricing centre for both onshore and offshore RMB financial products by 2015 and a global financial centre by 2020. These goals clearly set the blueprint for the internationalisation ofthe currency. Then there is Chinas work alongside the UKGovernment promoting London as a CNYcentre, operating in partnership with HongKong. Achieving this would make London the first CNY hub outside China and be a big step towards an international RMB.

It is likely that, as part of this, the Peoples Bank of China (PBOC) will sign a currency swap line with the Bank of England within a year, two at the most, enabling both banks to exchange a fixed amount of each others currencies to stabilise their own and improve liquidity. In time, London could even set up its own clearing bank for CNY. There are plans for another CNY centre in Singapore but the Chinese authorities see this more as a regional hub. They want Hong Kong to partner with London so that they have first-mover advantage in Europe. Another sign of Chinas move to make RMB aglobal reserve currency is that, traditionally, CNH the offshore version has traded at a different FX rate to CNY due to heavy regulation in mainland China. But that regulation has now eased and the rates have converged. The turning point of this convergence came when the PBOC widened the intra-day trading band on the onshore CNY exchange rate in April 2012. The countrys leaders and the PBOC governor issued statements at the time on allowing the CNY to be traded more freely a subtle message for a switch from a strong FX policy toa neutral or even slightly weaker one. But meeting the governments apparent deadline for RMB internationalisation is not going to be easy. CNY currently ranks 14th asapayments currency globally, with market share way behind the USD and EUR.

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The biggest barrier is that the CNY is not yet fully convertible, but it is just two steps short ofachieving that and three steps away from being an international currency. Those steps involve the authorities: allowing all capital account items to be settled freely in CNY both ways in and outof China; lifting all quotas and streamlining the application and approval processes; and increasing the use of CNY for international trade and investments. This is a simplification of course as the laststepin particular is huge, involves manydifferent areas, and the definition of aninternational currency goes far beyond thisdescription. Logically, it would be reasonable to expect China to make the CNY fully convertible beforeembarking on the ultimate goal of internationalising the currency.

But China appears to have put the horse before the cart by creating an offshore marketto promote the currencys use in international trade and investments first. Andthis offshore trade has taken the lead overthe onshore market. Again, the authorities clearly have a timeframe in mind. Chinas new leadership faces a number of problems. The countrys economy is slowing and, although we would expect the rate of GDPgrowth to pick up a little, it is unlikely to bea steep rebound. But promoting RMB as a global reserve currency, with all the economic benefits that willbring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.

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