Renminbi (RMB) What does the internationalisation of the RMB mean for you?
Since the late-2000s, the People's Republic of China (PBC) has sought to internationalize its official currency, the Renminbi (RMB). In 2004, Hong Kong resident could purchased yuan without required underlying up to 20,000 per day. The RMB Internationalization accelerated in 2009 when China established dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity.In 2013, the RMB was the 8th most traded currency in the world and the 7th most traded in early 2014. By the end of 2014, RMB has ranked 5th as the most traded currency, according to SWIFT's report, at 2.2% of SWIFT payment behind JPY (2.7%), GBP (7.9%), EUR (28.3%) and USD (44.6%). Currently (February 2015) RMB is the second most used currency in trade financing, and reach the ninth position in forex trading. The Renminbi Qualified Foreign Institutional Investor (RQFII) quotas were also extended to other five countries - the UK (extended 15 October 2013), Singapore (22 October 2013), France (20 June 2014), Korea (18 July 2014), Germany (18 July 2014), and Canada (8 November 2014), each with the quotas of ¥80bn except Canada and Singapore (¥50bn). Previously, only Hong Kong was allowed, with a ¥270bn quota. The launch of Shanghai-Hong Kong Stock Connect (SSE and HKEx) in November 2014, embarked China into the next stage of internationalization. In January 2015 Chinese Premier, Li Keqiang, announced a planned second Stock Connect linking Shanzhen and Hong Kong exchanges. The China's RMB internationalization and foreign exchange (FX) reforms are evolving rapidly and full convertibility is expected over the next couple of years.
2008: Cross-Border Trade RMB Settlement Pilot Project
Phase I: on 24 December 2008, China allowed import and export in RMB between (i) Yunnan province and countries in GMS including ASEAN countries (ii) Guangdong province and Hong Kong and Macau.
Phase II: on 1 July 2009, China officially announced regulation on RMB Settlement Pilot Project and opened up Shanghai and 4 cities in Guangdong (Guangzhou, Shenzhen, Zhuhai and Dongguan) with Hong Kong, Macau and ASEAN countries.
On 1 July 2010 expanded to Mainland Designated Enterprises (MDE) in 20 pilot areas (4 municipalities [Beijing, Tianjin, Chongqing, Shanghai], 12 provinces [Liaoning, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Guangdong, Hainan, Sichuan, Yunnan, Jilin, Heilongjiang] and 4 autonomous regions [Guangxi, Inner Mongolia, Xinjing Uygur, Tibet]), which allow to the cross border payment of current account items with any countries in the world.
By 2014, RMB cross-border trade settlement reached RMB 5.9 trn making a 42.6% (YoY) increase, which represent 22% of China's trading volume.
2009-present: Offshore Renminbi (CNH)
Since 2009, China has signed currency swap agreements with numerous countries such as Argentina, Belarus, Brazil, Canada, ECB, Hong Kong, Iceland, Indonesia, Malaysia,Singapore, South Korea, Thailand, the United Kingdom and Uzbekistan.The renminbi deposits in HK gradually grew from ¥12 billion in 2004 to ¥59 billion in 2009.
On 17 August 2010, PBoC issued policy to allow Central Bank, RMB offshore Clearing Banks and offshore Participating Bank to invest the excess RMB in debt securities, in onshore Inter-bank Bond Market. In October, China further open up both FDI and ODI in RMB (Pilot RMB Settlement of Outward Direct Investment) and nominated Xinjiang as the first pilot province (which in early 2011 expanded to 20 pilot areas). In November 2010, China and Russia began trading in their own currencies, abandoning the United States dollar as the medium of exchange in bilateral trade. This was soon followed by Japan in December 2011. On 19 December, the direct trading of yuan against Thai baht was launched in CFETS (Interbank FX trading system) in Yunnan and on 31 December, PBC released the Announcement of the People’s Bank of China Concerning the Implementation of Measures for the Pilot Program of Allowing Fund Management Companies and Securities Companies Approved as Renminbi Qualified Foreign Institutional Investors (RQFII) to Invest in Domestic Securities Market. The RQFII program allows RMB investment funds to be set up in Hong Kong and invest in mainland China's securities markets.
In the first quarter of 2011, the Chinese Renminbi surpassed the Russian ruble in terms of international trading volume for the first time in history.
In June 2013, United Kingdom became the first G-7 country to set up an official currency swap line with China.
As of 2013, the RMB is the 8th most traded currency in the world.
As of July 2014, 25 countries have signed the RMB Bilteral Swap Ageeement with PBoC with total facilities of over ¥2.7 trillion.
The scale of the offshore renminbi (CNH) market is still limited at the moment, with offshore renminbi deposits (around ¥1.5 trillion, of which 70% are in Hong Kong) only about 1% of that onshore (around ¥100 trillion), which is much lower than the ratio of 30% of offshore versus onshore US dollar deposits. The average daily turnover of offshore renminbi foreign exchange market (CNH) is about US$20 billion by the end of 2013. On November 17, syncronised with the Shanghai-Hong Kong Stock Connect debut, the HKMA has lifted the daily yuan conversion cap (¥20,000).
2013-present: Shanghai Free Trade Zone (SFTZ)
The SFTZ was launched on 29 September 2013 with key implementation details announcing in May 2014. The SFTZ is being used as a test ground for trade, investment and financial reforms, before the roll out to nationwide. The RMB can flow freely between Free Trade Account (FTA), non-resident onshore account and offshore account. Transactions between resident onshore account outside SFTZ and FTA with the same entity are also allowed provided they do not involve capital account transactions that are not yet approved by PBoC and SAFE.
RMB as a Reserve Currency
The road to the RMB Internationalization is far from complete. History suggests that;
- First, the size of the home economy must be large relative to others. In this, China is clearly justified.
- Second, economic stability in the form of low inflation, small budget deficits and stable growth is also important. China’s record of supportive government policies and macro-economic stability has undoubtedly contributed to the RMB’s appeal in recent years. The bursting of Japan’s bubble in the early 1990s was arguably one of the main reasons why yen internationalization stalled.
- Third, strong official and institutional support. This was an important reason for the dollar’s adoption as a global currency after the Second World War, formalised through the Bretton Woods system. China has been doing that in the last few years, promoting the use of RMB and its infrastructure with ASEAN, Russia, UK, Germany, Canada, Australia, etc. At the China Development Forum in March 2014, the People’s Bank of China (PBoC) stressed the importance of strengthening financial regulations, establishing a deposit insurance scheme and improving market-driven exit mechanisms for financial institutions, while pushing forward reforms.
- Fourth, deep, open and well-regulated capital markets are necessary so the currency can be used to finance trade as well as provide a large enough market in securities for investors. The opening up of China’s onshore capital market will be an important step in the RMB becoming a major investment currency. This is one area where progress has been deliberately slow. For the RMB to be a truly global and become a more widely held reserve currency there needs to be greater access for foreign investors to local capital markets, even deeper global RMB liquidity and wider cross-border flow channels.
Implications for the financial industry
- Trade settlement - The internationalization of the RMB allows foreign companies trading with mainland Chinese companies to settle the trade in RMB, thus, reducing FX cost, open up the opportunity to the larger markets and often secure better trade terms.
- Financing and borrowing - creation of dim sum and offshore RMB bond markets offer RMB borrows the chance to access a competitive and diversify funding sources. It is also opened up opportunities for international and retail investors.
- Capital management - free trade zone companies may borrow and lend funds directly with overseas (RMB cash pooling). This allows multinational companies to centrally manage their funds and make payments directly in RMB globally.
According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), many financial institutions are currently building up an RMB trade settlement, payments, foreign exchange, derivatives and clearing capabilities because the internationalization of the RMB has led to new sources of revenue for banks.