Standard Chartered: Taking RMB to the next level in international trade
- Higher weighting given to the yuan by IMF is expected to boost its value as a currency for global commerce and investment
- Bank says its strong presence in Asean countries puts it in a position to accelerate the yuan’s presence on the international stage
Since the mid-2000s the Chinese government has been in the process of liberalising and internationalising its currency, the renminbi (RMB), with the intention of reducing exchange rate risk, promoting development of the financial market and smoothing the way for Chinese firms to expand into global markets.
Kelvin Lau, a senior economist for Greater China at Standard Chartered, believes in the long-term strength of the Chinese economy and its currency. As the country morphs from a manufacturing-based to a consumption-based economy, he expects China to continue with the opening up of its financial market.
“There are a number of factors driving RMB usage beyond the mainland border,” says Lau. “Over the past few years, a large part of the driving force has been China’s capital account opening, which has facilitated two-way flows of financial capital in and out of the territory. In particular, increased foreign ownership of the China Interbank Bond Market has encouraged the holding of and transactions in RMB across countries.”
That said, much of the world is still heavily underweight in the Chinese yuan or Chinese assets. This is expected to change with the higher weighting given to the RMB by the International Monetary Fund (IMF) in its May quinquennial review of the valuation of the basket of currencies that make up the Special Drawing Rights (SDR). The yuan was given a weighting of 12.28 per cent, from 10.92, based on its role in international trade and finance.
Most recently, the Bank for International Settlements (BIS) announced the Renminbi Liquidity Arrangement, which has been developed in collaboration with the People’s Bank of China, to provide liquidity to central banks through a new reserve pooling scheme. The arrangement will complement existing BIS liquidity facilities in providing additional access to liquidity in times of market volatility.
“What it means is the world still needs to rebalance away from certain currencies towards the yuan,” Lau adds. “To broaden out RMB internationalisation and take it to the next level, we need a reacceleration in international RMB usage as a global trade currency to complement the strong cross-border capital flows.”
Push to make RMB a global currency
Lau points out that a range of long-term factors could boost the share of RMB trade settlement over time. “These include the persistence of US-China tensions prompting a structural shift away from overreliance on the US dollar for global settlement, or global manufacturers’ return to greater reliance on China production in the post-Covid world for its reliability, scalability and fast-growing domestic market,” he says.
Adding to these factors, the Regional Comprehensive Economic Partnership (RCEP), which took effect on 1 January, has opened a new chapter for regional trade and economic ties. The RCEP is the first free-trade agreement (FTA) to bring together the economies of Australia, China, Japan, New Zealand and South Korea with those of the 10 members of the Association of Southeast Asian Nations (Asean) trade bloc.
“With this new ‘Asian trade corridor’, it could provide new impetus for RMB redenomination,” says Karen Ng, managing director and head of China Opening and RMB Internationalisation at Standard Chartered. “Since China is a major trading partner of the Asean markets, the RCEP will add a further push to the economic momentum, and the redenomination of trade contracts in RMB may become more prevailing, going forward.”
The agreement is anticipated to significantly boost intra-region free trade. It will gradually remove 90 per cent of the tariffs among the RCEP member states in the next 10 to 15 years. According to an assessment by the Asian Development Bank, the RCEP is likely to add US$245 billion annually to the region’s income by 2030.
In addition, its common “rules of origin” framework allows RCEP countries to source a minimum of 40 per cent of product components within the bloc to qualify for tariff preferences when exported to other member states.
Relocating manufacturing capacity
The entry into force of the RCEP may speed up the process of relocating manufacturing capacity outside China.
“Many manufacturers operating in China are facing a high concentration risk and looking to diversify supply chains to other locations. For instance, the approach of ‘China +1’ means having one more manufacturing base in other countries such as Vietnam or Indonesia,” Ng says.
“We see several structural reasons to relocate in the medium to long run. Manufacturers in China have been negatively affected by major events in recent years, including the US-China trade conflict in 2018-19 and Covid-19.
“Nowadays entrepreneurs do not just look at where it is cheapest and fastest to produce, but also require their supply chains and manufacturing capacity to be more diversified and prepared for scenarios ‘just in case’,” says Ng. “Before this, Asean was benefitting from investment diverted away from China to the region due to rising costs in China, particularly hiring costs as labour supply had tightened. Other factors drawing investors included new market potential, attractive tax incentives by pro-growth governments in the region and FTA-related benefits.”
Meanwhile, Asean countries show tremendous growth potential with their large population and consumer base.
“Over the past three decades, countries in the East have been producing different kinds of goods to meet the consumer demand in Western markets. However, this is now changing,” says Ng. “The East is now producing for the East."
The RCEP will attract more investment from China into Asean countries, in particular in the areas of manufacturing, e-commerce and green technology. Ng believes the increase in trade between China and Asean countries will lead the market to use RMB more often as the settlement currency.
Strong presence in Asean countries
Standard Chartered is currently the only international bank operating in all 10 Asean nations.
“Our strong presence across the region, combined with our comprehensive range of RMB-related services, have made us a top choice for Chinese manufacturers who have already set foot in other Asean countries or are planning to expand or relocate part of their manufacturing capacity there,” Ng says, adding that non-China-based clients and suppliers may also need a RMB account to do business with Chinese companies.
Apart from being more frequently used in trade, RMB is gaining popularity as a global investment currency, since global investors increase their investments in RMB-denominated assets.
“Volatility across the broader foreign exchange and bond space has increased, given rising inflation expectations and central banks’ more hawkish stance in hiking rates. It is impressive to see the RMB’s relative resilience amid such broader volatility,” Lau says.
“We have long argued that RMB appreciation, especially if it is too one-way, should not be the sole reason for international users to start redenominating,” he says. “But having the currency demonstrating its ability to stay anchored and the potential to develop into a future ‘safe haven’ currency – and for the right fundamental reasons like having a sizeable current account surplus and persistent foreign interest in onshore assets – during volatile times certainly won’t hurt.”
Optimistic outlook for RMB
"With the strong foundation of the currency, the macro tailwinds, as well as the coming into force of the RCEP, RMB will be able to accelerate further its international foray," Lau says
“We are ready and keen to take RMB internationalisation to the next level, and we are enthusiastic about the opportunities arising from it, both as a global trade currency and a global investment currency. Standard Chartered is well positioned to help our clients in and outside China stay ahead of the curve and capture these opportunities,” says Ng.