The RMB’s ‘final frontier’

The renminbi is approaching the “final frontier”: full convertibility and transformation into a “normal” currency that is used by companies and individuals worldwide in the same way the U.S. dollar is being used.

Just last December, China began publishing a new index measuring the renminbi’s performance against a basket of other currencies, highlighting that it is no longer “pegged” to the U.S. dollar. Four months earlier, China announced a change to the USD-RMB fixing rate, better reflecting the supply and demand of the renminbi in the market.

And on Oct. 1 this year, the renminbi will join the International Monetary Fund’s Special Drawing Rights basket. Its weight in the basket will be smaller than only those of the U.S. dollar and the euro, underlining that, in some respects, the renminbi is already one of the world’s top three currencies.

However, in other areas, such as its usage in international payments, the renminbi trails not only the U.S. dollar and the euro, but also the British pound and the Japanese yen. So clearly, the renminbi’s internationalization journey still has some way to go.

But there are two powerful engines that will continue to propel the renminbi along that path. The first is the Chinese authorities’ determination to ease the restrictions that still govern capital inflows and outflows; the second is China’s continuous economic growth.

Slowly but surely over the past several years, China has opened up its capital markets to foreign investors. Programs such as the Shanghai-Hong Kong Stock Connect and the Renminbi Qualified Foreign Institutional Investor scheme are increasing the size of the foreign investor base permitted to trade in China’s capital markets.

One of the recent changes were announced just in February, when the authorities opened the China Interbank Bond Market up to “real money investors” — medium- and long-term institution such as foreign banks, insurance companies and pension funds. The move, which could pave the way for sizable foreign exchange inflows, followed an announcement in July 2015 that allowed foreign central banks and sovereign wealth funds to buy onshore Chinese bonds.

The latest change came last Monday when direct onshore trading of the renminbi and the Korean won in China’s interbank foreign exchange market just commenced.

These deregulation measures reaffirm China’s commitment to capital account liberalization, and they send a powerful message: China will continue on the path of reform.

The second engine that will propel the renminbi towards the “final frontier” is the Chinese economy itself.

After years of headlong, double-digit expansion, China’s economy is now growing at a more “normal” pace — 6.9 percent last year — but even that is producing tremendous extra output. In nominal terms, China’s GDP grew by $714 billion in 2015 — equivalent to the size of Switzerland’s economy, the 20th largest in the world.

The recently-adopted 13th Five-Year Plan aims for 6.5 to 7 percent growth per year from now until 2020. This, combined with government initiatives such as the “Belt and Road” regional infrastructure investment push, and Chinese corporates’ increasing efforts to stretch their wings beyond mainland China, will ensure that the renminbi’s role in world trade and investment continue to grow.

Already, almost 26 percent of China’s trade is settled in renminbi. That is a remarkable number considering that the scheme for cross-border trade settlement in renminbi was launched only in 2009.

For now, the lion’s share of this involves trade between mainland China and Hong Kong. The next step along the renminbi’s internationalization journey will happen when China’s other major trading partners start to transact their trade with China in renminbi.
Take Korea as an example: the country counts China as its largest trade partner, and it became China’s largest supplier of goods last year. If just a fraction of the two countries’ bilateral trade is settled in renminbi, this would greatly increase the size of the offshore renminbi pool. And it’s already happening: RMB payments involving Korea rose by 139 percent year on year in the first quarter of this year.

This is crucial, as the growth of the offshore market paves the way toward ever-greater international usage of the renminbi — in everything from cross-border payments to investment products for ordinary savers around the globe.

The ultimate measure of the renminbi’s “normality” will be when it begins to be used in transactions that do not even involve China: say, when a manufacturer in Korea pays its supplier in Thailand using renminbi — in much the same way that the U.S. dollar is already used by companies and shoppers around the globe to purchase goods that may have no connection to the United States.

The pieces of the puzzle are now rapidly falling into place. There is still some way to go, but the renminbi is already more than half-way along the path toward this ultimate measure of normality. By staying on its path, it will become a truly global currency.

In that journey, Korea is fast becoming a big player with a number of remarkable achievements. I believe that promoting renminbi internationalization is a unique and maybe — the only — chance of making Korea a regional financial hub.

*The author is president and CEO of HSBC Korea.

Martin Tricaud