Chinas attempts to internationalize the renminbi have suffered a setback amid expectations that the currency will fall in value.
The volume of Chinas current-account transactions settled in renminbi peaked in March and then stagnated. Their share having surged from 1.7% in July 2010 to 13.7% in June 2011 has declined, standing at 10.3% in June.
Dariusz Kowalczyk, strategist at Crédit Agricole, says the renminbi has still made some strides in terms of its share in global payments and trade financing, as well as its holdings by foreign portfolio investors.
However, its bread-and-butter use by Chinese domestic and foreign trading partners has declined despite the growth of offshore centres such as London, and Chinas push to establish more, including in Singapore and Taiwan, he says.
Kowalczyk says that setback reflects the changing outlook for the renminbi, with foreign exporters more willing to receiving payments in an appreciating currency characterized by low volatility, which is what the renminbi used to be.
Indeed, there is a strong correlation between expectations of the renminbis performance and the share of Chinas trade denominated in the unit.
Until the third quarter of 2011, foreign investors had been pricing in appreciation of about 2% per annum in the non-deliverable forwards (NDF) market, and acceptance of the renminbi in trade payments had been rising. The renminbis share in Chinas current-account flows stabilized when appreciation expectations in the NDF market began to ease, and fell when the outlook changed to expectations of depreciation.
Kowalczyk believes progress on renminbi internationalization will be slower until the currency rebounds and investors believe in its favourable outlook again.
While a clear recovery in the NDF market might have to wait for convincing signs of Chinas growth rebound, once this happens, internationalization might become easier again, he says.
And once the economy re-accelerates, expectations of CNY appreciation should return, boosting its acceptance abroad.