Should that happen, it would be a remarkable feat for a currency that five years ago was barely used at all by companies for global payments and trade settlement.
In an interview with Euromoney, ICBC’s cross-border renminbi experts say it is entirely possible it will become a mainstream currency alongside the dollar, euro, sterling and yen in the next three years, and that the liberalization of the capital account is ultimately crucial for this to happen.
The renminbi is increasingly being used by multinational companies as a global payments and trade-settlement currency. What are the main factors driving this?
China has become the world's second-largest economy. However, the renminbi’s position is not in line with the market position of China’s economy. People's Bank of China launched cross-border renminbi business in 2009, and from then on the business has grown rapidly. The main factors that are driving the renminbi’s use as a global payments and trade settlement currency are as follows.
First, China’s economy has been growing and developing and as a result forms a larger part of the global economy. On the one hand, Chinese companies are going abroad, and making investments all around the world. On the other hand, China has always been an attractive market for foreign multinational corporations to invest in. It seems clear that the frequent inward and outward cross-border transactions create fantastic opportunities for using the renminbi, since by using this, investment procedures can be simplified and companies can avoid foreign exchange risks. As China’s economy grows more prosperous and stable, the renminbi has become an investment currency for foreign companies. Driven by this, Chinese commercial banks have been expanding their overseas business in order to offer better services for their clients and improve the use of the renminbi in the offshore market. As a result, several offshore renminbi centres have been established, supporting the growing global demand for renminbi business.
Second, renminbi investment channels have expanded. Cross-border trade settlement, dim sum bonds, and renminbi outward direct investment, for example, can all be used by domestic companies. And meanwhile options such as cross-border renminbi trade settlement, dim sum bonds, RQFII [renminbi qualified foreign institutional investors], panda bonds, RFDI [renminbi foreign direct investment], renminbi foreign exchange business, can be used by foreign companies and investors. The mechanism of renminbi input and output has been established, followed by the increase of renminbi deposits in the offshore market and the accumulation of an offshore renminbi capital pool.
Furthermore, it is China’s strategy to promote the use of the renminbi as a payment and trade-settlement currency domestically and overseas. China’s central bank has signed currency-swap agreements with 23 countries and regions including the European Union, the UK, Singapore and Hong Kong, and the total volume has amounted to Rmb2.57 trillion [$412 billion], which to a large extent is helping to promote the use of the renminbi overseas and build the market confidence required to ensure the renminbi market’s stability.
The renminbi still has a long way to go before it starts to challenge the dominance of the US dollar, euro and sterling in global payments and trade settlement. For the renminbi to become one of the top global payments and settlement currencies, what will need to happen (particularly in relation to government reforms)?
In recent years, the Chinese government has been undertaking certain reforms, and one of the most important objectives is to build a free financial market, which is of vital importance for the renminbi’s internationalization. There is still a lot of work that needs to be done before the renminbi becomes one of the top global payments and trade-settlement currencies. To achieve that, the renminbi needs to go through the following stages.
The first step is to be one of the main settlement currencies, the second is to become an investment currency, and the final step is for it to become a reserve currency, which will mean receiving special drawing rights from the IMF.
As for the first two steps, the renminbi has already achieved this. The renminbi surpassed the euro to become the second-most-used currency in trade finance last December. In addition to this, the renminbi earlier this year dislodged the Swiss franc to become the seventh-most-used world payments currency, according to Swift data.
As for the third and final step, several countries, such as Nigeria and Cambodia, have already taken the renminbi into their foreign-currency reserves, and we hear nearly 40 other central banks are considering taking the same course of action.
As the renminbi becomes more and more popular in the overseas market, and along with a freer financial market in mainland China, SDR and dual-currency swap agreements, the renminbi will become a welcomed new player for international trade settlement, finance and investment.
Do you expect the renminbi to be one of the top-five global payment and trade settlement currencies in the next three/five/10 years?
We expect the renminbi to be one of the top-five global payment and trade currencies in the next three years. The growth of cross-border renminbi transactions is important and impressive in recent years. According to the latest Swift statistics, the renminbi is ranked as the seventh-most-used global payments currency and the second-most-used currency behind the dollar for trade finance. Therefore, it is predictable that the renminbi could be one of the top-five global payment/trade settlement currencies in the next three years.
Do you agree or disagree with the following statement? True renminbi internationalization will be hard to achieve so long as China's capital account remains closed, which makes use of renminbi for trade settlement and investment difficult.
From our point of view, the full opening of China’s capital account is a prerequisite for achieving the ultimate goal of renminbi internationalization. But for historical reasons, China’s capital account has not been completely opened up yet, and the renminbi market is split into two parts: the onshore market and the offshore market. As such, the current status of China’s capital account may cause some inconvenience and lack of motivation for using renminbi for cross-border transactions, such as in trade settlements, payment under current-account items and especially in renminbi investment.
However, ICBC agrees with the state policy of opening up the capital account step by step. And we believe that the boundaries between the onshore and offshore renminbi market will disappear eventually, and this process should be done slowly and steadily.