There has never been any doubt that the continued growth of China’s influence on the world stage would eventually lead the country’s currency to become a growing force in the global FX market. But the liberalisation of renminbi over the past five years has happened at a pace that has surprised even the most hopeful of market participants.
Since currency controls first began to be relaxed in 2010, Chinese authorities have pursued an aggressive agenda to create a major offshore currency for trade, investment and reserve management purposes. Renminbi is now supported by central banks and commercial banks in a host of major financial centres, while international investment schemes have opened up the currency to global participation for the first time.
“Just as China’s rapid yet predictable growth has been a comforting constant at a time of unprecedented global economic upheaval, the ascent of its currency has been sure and swift – surer and swifter indeed than few thought possible and even fewer predicted,” observed HSBC group chairman Douglas Flint in a speech in London last year.
Progress may have been swift, but renminbi’s share of global FX turnover is still small in relative terms. The currency makes up less than 0.7% of trading in London, according to the latest semi-annual survey by the Bank of England, and it ranked as 9th most actively traded currency in the 2013 survey by the Bank for International Settlements, trailing a long way behind the US dollar, euro and yen.
But it is widely expected that renminbi will eventually sit alongside the world’s top currencies as investors, corporates, commercial banks and central banks build the infrastructure needed to support the currency. Renminbi is already the fifth most active currency for global payments, according to SWIFT’s monthly RMB tracker, and its use as an investment currency is also growing.
“The use of renminbi as a trade financing and payments currency has grown very rapidly, to the extent that corporates can now buy and own the currency, as well as using it to pay for goods and services. As a trade currency, we can consider it to be liberalised already, and it is making good progress in becoming a major investment and reserve currency in its own right,” says Beng-Hong Lee, head of markets China at Deutsche Bank in Shanghai.
One of the most significant developments, Lee believes, has been the proliferation of offshore clearing centres, a process that requires the People’s Bank of China (PBoC) to officially designate a clearing bank for that centre. While renminbi can still be traded in locations that don’t have their own clearing bank, the existence of a clearing bank drives greater awareness and understanding of the currency.
Meanwhile China itself is expected to push ahead this year with the launch of its long-awaited international payment system, known as CIPS, which will enable standard cross-border clearing of renminbi among onshore and offshore participants. With a number of banks understood to be testing the system already, it is expected that CIPS will remove common processing challenges encountered when trading renminbi, placing it on a more level footing with other global currencies.
“The introduction of CIPS will mean that instead of having an offshore clearing bank connected into the PBoC, clearing can finally be done through the domestic central banks, which is a format that is more familiar from the rest of the currencies that we deal with and much more efficient,” says Lee.
For investors, access to renminbi has been enabled by the continuing growth of the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme. As the trading band between which renminbi is allowed to trade against the US dollar has been gradually widened in recent years, RQFII has offered a mechanism for renminbi accumulated offshore to be invested back into China.
Use of renminbi among central banks is less widespread than among commercial banks, investors and corporates, but some reserve managers are already understood to be including the currency in their reserve allocation. Just as the increase in offshore clearing centres and expansion of RQFII have generated opportunities for investors and corporates, the admission of renminbi to the IMF’s special drawing rights (SDR) basket, which currently includes the euro, yen, sterling and US dollar, could have a similar effect on reserve managers.
“We will continue to see a lot more investment channels open up into and out of China, as QFII and RQFII are expanded to more locations and their quotas are increased. Use of RMB as a reserve currency will also continue to rise, particularly if it is accepted as part of the special drawing rights regime,” says Lee.