A senior German central banker has warned China that its “discreet policy interventions” in the renminbi (Rmb) are not helping the country’s exports.
Speaking at the Asian Financial Forum in Hong Kong this week, Andreas Dombret, who is a member of the executive board at the Bundesbank, said that the Rmb lacks the transparency and freedom required to be a truly international currency.
Dombret criticised the People’s Bank of China (PBOC)’s “somewhat difficult to predict changes in regulation, and the perceived high degree in political interference in the Rmb price formation”, which he said are resulting in a lack of trust among foreign investors in the system.
He told delegates, among which was GTR: “Let me also be clear with regard to one sometimes also voiced accusation. According to our estimates, the estimates of the German central bank, the value of the Rmb doesn’t provide Chinese exporters with a competitive advantage. That is something that our estimates don’t really show. On the contrary, price competitiveness of the Chinese economy is estimated to be rather low, and from this perspective, accusations of an undervalued Rmb are actually not warranted, this is not something we would subscribe to.”
Having embarked on a well-publicised mission to internationalise the Rmb, the PBOC reversed course in the midst of increase capital flight from the country. At the end of 2016, currency reserves were down to their lowest levels for more than five years, with net outbound Rmb payments of more than Rmb1.8tn for the year to date. The Chinese government turned to currency controls as a means of arresting the decline.
The move placed huge pressure on trade finance bankers and treasurers, stifling the flow of cross-border debt capital, but also restricting the ability of companies to repatriate their profits. And while the PBOC has taken some measures to rectify this (earlier in January, it lifted the ban on overseas companies taking their profits out of China), Dombret encouraged it to do more.
“The Rmb is much more international than in previous times, however, to be a really international currency the Rmb needs to be much more flexible and it also needs to become much more convertible. Existing capital controls need to be dismantled substantially in order to achieve this goal. If carefully managed, the internationalisation of the Rmb can be expected to be beneficial not only to China, but also for the world of the whole,” he said.
In the years prior to the capital controls, the noise around Rmb liberalisation and internationalisation was deafening. The PBOC opened clearing hubs around the world, with jurisdictions falling over one another to get a piece of the pie. But as the brakes were applied, only a few voices remain championing the Rmb.
Among those are banks heavily invested in China and Swift, which continue to promote the Rmb abroad. One common point of conversation is the Belt and Road Initiative (BRI), China’s ambitious infrastructure plans, which some analysts claim will double as a tool for internationalising the Rmb. If Chinese banks are lending in the Rmb, the argument goes, then it will become more international by default.
“The BRI is not funded by foreign aid or foreign direct investment but loan financing. This contains risks for both the lender and the borrower, especially for loans to some specific areas like Central Asia and Africa. Nevertheless, the BRI is likely to have a fairly enduring impact for both the immediate region, especially Southeast Asia and Australia. Beyond the likely increase in regional trade, the potential for increased usage of the Rmb for both transactions and reserve allocations, is fairly substantial,” wrote Christy Tan, head of markets research for Asia at National Australia Bank in a recent report.
However, as Dombret implies, the performance of the currency since it was effectively designated as an official reserve currency by the IMF in 2016 has been underwhelming.