International usage of the renminbi (RMB) is in its early days. There are, however, many benefits to be achieved through the liberalisation and promotion of the use of RMB beyond China’s borders.
The People’s Bank of China (PBOC) has taken concrete steps in the recent past to internationalise the currency. The pilot programme of direct settlement, which was started three years back, was extended to all enterprises this year. Specific initiatives around RMB bond restriction relaxation, extension of the trade settlement scheme to the different corners of the globe (Australia, Middle East, Latin America, etc), long-term RMB-denominated loans to foreign governments, and the development of a new international payment system to facilitate cross-border RMB clearance among market players, have established the RMB as a key currency in the global arena.
Ramping up of retail RMB offerings by banks in offshore markets like Singapore and Hong Kong has also contributed to the globalisation push of the currency. By the end of 2011, China had conducted cross-border RMB trade settlements valued at RMB2.58 trillion (US$410bn), accounting for nearly 10% of the country’s total trade. Overseas direct investment settled in the currency reached RMB20.15bn, while foreign direct investment was RMB90.72bn, according to statistics from the central bank.
With all these initiatives in place, the currency should ideally be one of the most dominant currencies across the globe. However, that does not seem to be the case yet. According to a SWIFT report, published in June 2011, the RMB was world payments currency number 21, with a 0.24% share in payments value, while China’s share in world trade was 11.4% in 2010.
In the foreign exchange (FX) business, the RMB is currently under-represented when compared to the size of China’s economy. With a world market share of 0.9% in FX value in June 2011 and a world GDP share of 9.5% in 2010, this in turn converts to a FX/GDP co-efficient of 9%. This is very low, compared to other Asian currencies.
These figures show a clear underutilisation of the RMB in relation to China’s economy. Even with the benefits introduced by the Chinese government, banks outside of the Greater China region have yet to see a positive return on investment (ROI) on building out the RMB trade settlement infrastructure.
Asian corporates trading with mainland institutions are not keen on the idea of pushing RMB as the key currency for trade because of various reasons, such as a lack of attractive yields on RMB liquidity management options and a lack of awareness.
With the broad steps in place towards making RMB a global currency, it still remains to be seen how the steps taken by the Chinese government so far cascade down to the actual increase in usage of the currency outside of the mainland.
Going forward, it will be important for banks in the region to put measures in place to identify the drivers for usage of the currency for different types of corporations. In addition, initiating specific programmes such as industry-targeted liquidity solutions to increase usage of the RMB currency will also help to make it truly international.
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