China, the Renminbi and Asia’s Treasurers

For the second issue running, gtnews Asia Bulletin has two articles on the internationalisation of the Chinese currency. This is simply a reflection of what appears to be an increasingly credible view in Asia: that the renminbi will become fully convertible sooner rather than later. And this raises the question of whether banks and corporate treasuries are preparing for that ever-likelier eventuality as much as they can today, to get ahead of the competition tomorrow.

What has been evident in China in recent years, particularly after the 1997 Asian financial crisis, is how methodically policy planners have been implementing economic and financial reforms. The Chinese approach is to deliberate, often for years, on important changes. But once consensus has been reached, the planners move rapidly on execution.

Take banking reforms. Years of discussion, manoeuvring and backroom preparation culminated in foreign banks being allowed to buy minority stakes in China’s major state-owned institutions and the subsequent initial public offerings (IPOs) of those Chinese banks in the mid-2000s. Today, barely five years later, five mainland Chinese banks have cracked the Fortune Global 500 list of the world’s largest companies. International and Commerce Bank of China (ICBC) and China Construction Bank (CCB) are now the planet’s most profitable banks, with US$15.9bn and US$13.3bn in 2008 net earnings, respectively.

In some ways, the current external environment argues for faster movement on the renminbi. The US dollar is becoming a shadow of its former self, steadily losing value against the world’s other major currencies as President Barack Obama’s administration grapples with a record US$1.4 trillion budget deficit. The US Federal Reserve is also unable to raise interest rates even as other countries such as Australia start to tighten monetary policy, thus boosting their currency.

That’s not good for China’s US dollar hoard. As Standard Chartered Bank’s Samuel Mathew notes in his recent article for gtnews, Beijing has to continuously purchase the dollar to maintain a stable exchange rate. However, the value of those holdings – more than US$800bn in US treasury bills alone – is deteriorating as the greenback weakens. And because the RMB-dollar exchange rate is stable even as the dollar depreciates against other Asian currencies, China is attracting stronger capital flows, risking inflationary pressures.

Moreover, as JPMorgan’s Lisa Robins observes, “some within China see full convertibility – and the development of China’s capital markets – as necessary to China becoming a full power on the world’s financial stage, and, longer term, the possible adoption of the renminbi as a world reserve currency.” They also believe that a fully convertible renminbi is crucial to China’s plans to develop the financial industry and to make Shanghai a global financial centre.

The pilot programme on the use of the renminbi for cross-border trade settlement to or from five Chinese cities and Hong Kong, Macau and the Association of Southeast Asian Nations (ASEAN) countries is the clearest sign yet that China’s policy-makers have arrived at a consensus. “We can imagine the yuan becoming a convertible, tradeable currency in Asia within a decade or two among China, the ASEAN countries, and the other Plus countries [Japan, Korea and India],” writes Richard Brown of the Bank of New York Mellon, although he believes that the renminbi is unlikely to replace the dollar or even serve as a second currency in the next 20 years.

A decade? Full renminbi convertibility may come as early as three to five years. And then, ready or not, treasurers across Asia will have to deal not only in dollars and their local currency, but also in renminbi. Cash visibility, real-time reporting, hedging, matching currency of expenses with currency of sales, foreign exchange (FX) management, taxation, anti-money laundering (AML) regulations and other associated tasks will become more urgent concerns. The treasury function that laid the foundations early in terms of infrastructure, know-how, personnel and procedures will hit the ground running when the inevitable happens.


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