March of renminbi as global currency has passed the point of no return
Carmen Ling says political will remains a key driver even if China's massive economy is slowing
Will renminbi internationalisation flop? What if China grinds everything to a halt? These were questions raised by clients during my recent roadshow in Europe.
In contrast to the upbeat spirit in the past few years, recent news about the Chinese economy has been overwhelmed by its departure from high-speed growth, the labyrinth of shadow banking and the humongous figure of local government debts. When nothing should be taken for granted after the financial crisis in 2008, this is valid scepticism from those far from the centre of the action.
If we put the issues into perspective, it's clear that renminbi internationalisation is a one-way train, and the question is its speed, not direction. Political push is one of the four key elements needed to take a currency global, along with a deep financial market, a sizeable economy and a sustainable growth trajectory.
Beijing has exerted unwavering and resolute political will to carry out reform of its economy. Over the past 10 years, the market has witnessed the complete opening up of renminbi trade settlement, the availability of renminbi clearing services in four cities worldwide, the establishment of 24 renminbi swap lines with other central banks, and the proliferation of offshore yuan-denominated bond markets.
The list keeps expanding, with the latest additions being the inception of the pilot free trade zone in Shanghai, the widening of the trading band, the abolishment of lending rate limits and the Shanghai-Hong Kong share-trading programme. Saying these policy changes have come faster than expected is an understatement.
And, from New York and Toronto to Paris and Frankfurt, nations have expressed an interest in becoming the next offshore centre, and at least 40 central banks have invested in the yuan and several others are preparing to do so. It cannot go wrong when so many countries are trying to get on the bandwagon.
China's financial markets have made substantial progress in terms of depth and breadth in the past decade. At the end of last year, A-share market capitalisation had reached 23.9 trillion yuan (HK$30 trillion), and its bond market 29.9 trillion yuan. One should also take into account Hong Kong, where the majority of the 291 billion yuan worth of dim sum bonds were issued in 2013.
Moreover, the onshore and offshore renminbi foreign exchange daily trading volume has nearly quadrupled since 2010 to US$120 billion in 2013, making the renminbi the ninth most actively traded currency globally.
Over the past decade, China has quickly risen to become the second-largest economy in the world, and is on course to overtake the US. Sustaining its growth trajectory remains a wild card in the voyage. Yet, even if growth slows, we would see at most slower progress in renminbi liberalisation, not a total halt.
Take reference from the Japanese yen, once an up-and-coming currency that lost momentum following the 1997 Asian financial crisis. A significant proportion of the country's trade is still settled in its local currency today, and Japan's economy is still too big to be ignored by global trading partners. China, whose gross domestic product is nearly double Japan's, has only 17 per cent of its trade settled in renminbi, showing the tremendous potential.
China is marching renminbi internationalisation forward in a prudent manner. As with all its other groundbreaking policies, it has a mechanism of checks and balances to weed out participants that deviate from its reform blueprint, just like the moratorium imposed on China's initial public offerings. What's more, risk management is delegated to all participants - market players, including banks, should all be disciplined in aligning with the regulator's agenda.
Banks aspiring to play a part in the epic journey of capital account opening have been playing the role of gatekeeper to help control the risks. As corporations are allowed greater flexibility in managing their cross-border funds flow, banks have to ascertain whether these flows are being used to support the genuine business needs of clients, which would, in turn, contribute to the real economy of China.
Banks, especially those that have built a strong presence in China, have been helping bridge the wishes of companies and the concerns of government, and help corporates understand the regulations and identify opportunities.
China has come a long way in terms of opening its capital account. But still, this is only the beginning. With the signal released by the latest Shanghai-Hong Kong share-dealing "through train", more liberalising measures await the serious players.
The renminbi internationalisation process has been set in motion, and all the evidence shows that it has passed the point of no return. Corporates with the right intentions can be confident to jump on board.
Carmen Ling is global head of RMB Solutions at Standard Chartered