China wants to have its cake and eat it when it comes to the renminbi. Beijing is loosening restrictions on the use of the currency but not so much as to make it fully convertible on its capital account.
China has been elevating the importance of its currency in the international financial system for some time witness the swap deals it arranged with some Latin American and Asian countries last year to provide liquidity.
Over the past few months, however, the authorities have accelerated their drive to make the renminbi more global. One recent measure includes expanding a pilot scheme to allow cross-border renminbi trade settlement. The global volume of renminbi trade settlement is growing fast, albeit from a low base. Volumes were up about 20 times in the first half of this year compared with the last six months of 2009. A number of banks are holding international roadshows to encourage companies involved in cross-border China trades to settle in renminbi rather than the dollar or euro.
In the capital markets, too, momentum is gathering for the Chinese currency thanks to recent reforms. Qualified investors can now invest onshore in Chinas interbank bond market. It means that firms that accept payments in renminbi have somewhere other than a bank in which to invest them.
The government is also encouraging the development of offshore renminbi markets in Hong Kong. In July, for example, Hopewell Highway Infrastructure, a Hong Kong toll road operator, became the first non-mainland-domiciled corporate to issue renminbi-denominated bonds. At the same time, the Hong Kong subsidiary of China Citic Bank issued the first-ever offshore renminbi certificate of deposit a $500 million, one-year note.
Then in August McDonalds became the first non-Chinese company to sell a renminbi bond, taking advantage of an easing in rules for foreign firms earlier in the year. The deal, at an equivalent of $29 million, is not large enough to be dubbed a Big Mac but its symbolic importance cannot be dismissed. Wal-Mart and Russian aluminium company Rusal look like they will follow.
Yet for all this, the renminbis status as a global reserve currency will be limited so long as China refuses to budge over the convertibility of its currency and retains control over its value. The Peoples Bank of China has removed the dollar peg it adopted in 2008 as an anti-crisis measure. But it still maintains a managed float against a trade-weighted basket of currencies.
Beijing is worried that freeing up its currency will undermine its export-driven model. The government has given little indication that it wants to change its mercantilist ways, given that a rebalancing of Chinas economy requires extensive domestic reforms, such as the establishment of social safety nets. A fully convertible currency also means giving up control. Thats not on the agenda either.
The renminbis march towards international recognition may be a matter of time. But it will be a longue durée before it replaces the dollars primacy.