The renminbi’s journey to liberalisation is underway. Finbarr Bermingham speaks to currency experts to find out if we should believe the hype.


“It’s simple: there are no good alternatives to the dollar. Any time you think of the dollar losing its dominance, you have to ask yourself: if not the dollar, then what? And there’s no good answer.”

These are the words of Eswar S Prasad, the former head of the IMF’s China division and the author of The Dollar Trap, an account of how the US dollar tightened its grip on global finance, spoken in an interview with the New York Times in 2014. His statement is pertinent for a number of reasons.

One, because for the first time since the euro was launched in 1999 people are talking about a currency that may soon become an officially recognised reserve currency and are, in some cases, making absurd predictions as to when it will eventually usurp the US dollar. And two, because the currency in question is the Chinese renminbi (Rmb) and, given the author’s previous position on the IMF’s China board, his efforts to dampen expectations around the Rmb should certainly be heeded.

It took more than 30 years from the time the US became the world’s largest economy for the dollar to become the international reserve currency of choice. And so any talk of the Rmb should be tempered with the caveat that the currency is very much a work in progress on the international stage. But the progress that it has made to date has come at a remarkable pace.

It is easy to forget just how nascent the Rmb’s ascent is. It was only in 2007 that the People’s Bank of China (PBOC) launched the first dim sum bonds and created an offshore Rmb bond market. A year later, China permitted import and export of Rmb between Yunnan province and some neighbouring countries, and also between the Guangdong province and Hong Kong and Macau. 2009 saw China sign currency swap agreements with a range of countries, a process which has been accelerated ever since. In 2013, we saw the launch of the Shanghai Free Trade Zone (FTZ), a test ground for trade and investment and perhaps, most importantly, for Rmb liberalisation. Three additional FTZs were announced earlier this year.

The fact that the internationalisation of the Rmb gets so much attention partly relates to the broader picture of China’s rise as economic and political heavyweight. Arjen van Dijkhuizen, ABN Amro

“It’s certainly deserving of the attention it is getting,” responds Kelvin Lau, senior economist at Standard Chartered, when asked whether the Rmb is worthy of the hype. “It’s one of the fastest-growing financial markets in the world and it’s part of a bigger and more exciting story, which is about the transformation of the whole Chinese economy.”

The deluge of figures heralding the currency’s growth expands every week. In May, it was announced by Swift that the Rmb had become the most used currency in Asia Pacific for settling trade with Greater China. Its usage on this particular trade route had grown by 327% in the three years from April 2012. Around a quarter of China’s trade is now settled in Rmb, up from around 15% last year. This has seen the currency propelled into the world’s top five, in terms of trade settlement.

It all feeds into the bigger picture: China stamping its authority on the world trade stage, launching various highly visible investment initiatives and staking its claim as a power to rival those in the west.

“The fact that the internationalisation of the Rmb gets so much attention partly relates to the broader picture of China’s rise as economic and political heavyweight. This goes hand in hand with the country’s ambition to play a more dominant role in the global financial system,” Arjen van Dijkhuizen, senior Asia economist at ABN Amro, tells GTR.

“This is a broad issue, which was also reflected in recent discussions following the establishment of the Asia Infrastructure Investment Bank (AIIB). Rmb internationalisation is one of the tools the Chinese government uses in its strive to increase China’s global outreach, while also reducing its dependence on the US dollar as a currency for trade and investment,” he adds.

Next stop?

Even those who hyperbolise the Rmb’s trajectory most forcefully, however, are stumped when asked to put a definite timeline on Rmb internationalisation. Many are surprised by the pace with which the PBOC has ushered in reform. Some analysts warn over the pace, recalling the crash that swept through Southeast Asia in the late-1990s, which can be directly traced back to the opening up of currency markets, and subsequent speculation.

The Chinese government, though, has demonstrated time and time again a willingness to manage economic issues patiently and with some modicum of flexibility (case in point: the ongoing restructuring of the economy, which has not stopped huge capital injections when required).

“The crash-scenario is just nonsense when referring to China. For one, knowing how cautious the PBOC is, leaving the Rmb ‘snaking in the tunnel’, before a full-market exchange rate, means China is just about ready to go. Secondly, China’s huge forex reserves are the cushion East Asian emerging markets were lacking in the years of the Asian financial crisis,” Professor Miriam Campanella, a China-watcher from the University of Turin tells GTR.

Over the last couple of years they have been aggressively expanding the bridges that allow the Rmb to go in and out of China. Kelvin Lau, Standard Chartered

Kelvin Lau uses a transportation analogy when discussing the timeline he and his colleagues have placed on further liberalisation; one that implies that now China has much of the basic architecture in place, it should begin to increase the volume of currency traded.
“We always use the analogy of a bridge and traffic,” he explains. “Over the last couple of years they have been aggressively expanding the bridges that allow the Rmb to go in and out of China. They’ve been controlling the amount of traffic that goes through it. Going forward they’ll look to utilise the existing bridges they’ve built but to allow more traffic on them. It’s all about more bridges and traffic.”

Some indication of the route it will take can be gleaned from the PBOC’s statement earlier this year that it hoped to achieve convertibility under the capital account, with the governor Zhou Xiaochuan alluding to plans to alter regulations around exchange rate controls, liberalising inward and outbound investment and opening up certain financial markets to overseas investors. However, this is likely to be a piecemeal process, with no definitive timescale or deadline, and analysts aren’t expecting full liberalisation any time soon.

Basket case

In the very near future, a significant gauge of the Rmb’s progress will be whether the IMF includes it in its special drawing rights (SDR) basket of currencies. The SDR is defined by the IMF as: “… an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. As of March 17, 2015, 204 billion SDRs were created and allocated to members (equivalent to about US$280bn).”

Currently, the SDR basket consists of the US dollar (41.9%), euro (37.4%), pound sterling (11.3%) and Japanese yen (9.4%). To qualify for SDR inclusion, further liberalisation of China’s capital account is needed, as a currency should be “freely usable” to qualify for inclusion in the SDR basket. China’s currency is convertible for current account transactions (trade, tourism, etc), but there is no full capital account convertibility as there are still many restrictions on ongoing and outgoing financial flows.

The quinquennial review is scheduled to take place later in 2015 and the most recent ruminations from the fund suggest that the barriers to China’s currency are becoming less obtrusive to its inclusion.

Speaking in Beijing in May, the IMF’s first deputy managing director David Lipton said: “While undervaluation of the renminbi was a major factor causing large imbalances in the past, our assessment is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.”

The train has left the station. It’s moving slowly, but we all know it will arrive. Steven Beck, ADB

The Rmb’s inclusion would be validation for the Chinese government’s liberalisation programme, from an institution that has erstwhile been dominated by the west (although the IMF has also been a very vocal supporter of the AIIB, it must be added).
Van Dijkhuizen acknowledges that the inclusion would be significant, but that it would not mean that the Rmb is a fully-global currency. “While inclusion of the yuan in the SDR basket would facilitate the further use of the currency in international trade and finance, this issue is partly symbolic,” he says. “There are smaller currencies such as the Swiss franc which are not included in the SDR basket but are used as a global reserve currency, for instance. Expansion of the Rmb in international trade and finance would also depend on the way China will liberalise its capital account and financial regulations going forward.”

A recent HSBC study showed that despite optimism among international companies about their future usage of the Rmb, there was widespread lack of awareness around the rules and the current status of the currency’s usability. In many boardrooms, the conversation centres on how to use the Rmb, rather than when and why. This, again, shows the infancy of the Rmb on international markets.

The journey, however, is underway, we just don’t know how long it will take. As Steven Beck from the ADB’s trade finance programme puts it: “The train has left the station. It’s moving slowly, but we all know it will arrive.”