RMB internationalisation: currency to grow in stature as China implements initiative
As China pushes forward with its global trade and economic initiative, the yuan can provide a strong alternative currency in belt and road economies
Much has been said about the infrastructure projects that are key components of Beijing’s global trade and economic strategy, the “Belt and Road Initiative”.
Nonetheless, a crucial piece of the jigsaw puzzle is the internationalisation of the renminbi, allowing emerging markets an important alternative when it comes to currency investment and hedging.
In October last year, the yuan joined the International Monetary Fund’s reserve currencies basket, marking the growing significance of the currency on the global stage.
However, overseas investors are reluctant to increase their yuan holdings, largely because of capital controls and currency interventions. They are put off by the difficulties in repatriating the capital from within China.
China has faced substantial capital outflow pressure since its exchange rate reform in August 2015, triggering Beijing to impose tight capital controls.
Professor Edwin Lai, who lectures at the economics department at the Hong Kong University of Science and Technology, says there is still a long way to go before the yuan achieves full recognition, and challenges remain. Lai says that there is still insufficient breadth and depth of the Chinese financial market, which is still not liberalised, as Beijing continues to impose capital controls.
Still, it is vital for China to make the yuan a global currency in belt and road economies. The trade in oil and gas between China and Russia is settled in renminbi. As the world’s second largest economy, China has an insatiable appetite for energy and minerals, and can take advantage of this to promote yuan pricing and settlement with other belt and road economies.
To put things into context, oil and other fuels are the top trading products for belt and road countries.
According to data from China’s State Information Centre, in 2016, total international trade of the 64 belt and road countries amounted to US$7.2 trillion, accounting for 21.7 per cent of global trade. China’s total international trade amounted to US$3.7 trillion, accounting for 11.2 per cent of total global trade. Obviously, in terms of economies of scale, trade volume of the belt and road countries is much higher than China’s.
Since the launch of the “Belt and Road Initiative” in 2013, Beijing has signed currency swap agreements with 33 countries and several leading world cities, such as Hong Kong, Singapore, London and Sydney – all are vying to become the next offshore renminbi hub.
Nevertheless, there has been market turbulence which has hit the yuan, especially since the stock market took a dive in the summer of 2015 when the currency depreciated.
However, Standard Chartered, which launched an industry benchmark with its Standard Chartered Renminbi Globalisation Index, reported in March that offshore renminbi had stabilised.
“The yuan and its offshore counterpart have enjoyed new-found stability since early 2017, partly due to a retreating US [dollar],” the report said, but scepticism remains among businesses on using the renminbi.
However, Lai says: “It [the renminbi] seems to be out of favour for the time being, but it will come back in [favour in a] couple of years, when the Chinese economy gets [stronger].”