Background on the Renminbi Hub
Why is RMB an important currency?
- China is the world’s second largest economy, accounting for about 12% of global GDP in 2013.
- China is the world’s largest exporter and second largest importer accounting for about 10% of world trade in 2014.
- China was the world’s second largest importer of commodities in 2013.
- China received USD 119.6 billion in foreign direct investment in 2014.
- China is the world’s largest holder of foreign exchange (“FX”) reserves with USD 3.8 trillion in reserves at the end of 2014.
- Stock market capitalization is the 2nd largest in the world.
Internationalization will create more economic stability
- Reduction in currency risks for importers and exporters if there is an increase in RMB use in trade with China.
- Reduction in China’s exposure to USD exchange rate volatility if the RMB has a greater international role.
- Increase in the number of central banks holding RMB as part of their reserve diversification process.
A history of RMB internationalization
A single global RMB market is the “end game” goal of the liberalization process. To be considered “international,” a currency must have the following cross-border functions: (1) a unit of account (used for invoicing); (2) a medium of exchange (to settle cross border trade); and (3) have a store of value (reserve currency).
RMB liberalization began in earnest in 2002, and efforts have expanded rapidly in recent years.
Internationalization efforts are evolving rapidly
What’s next for RMB?
Chinese policy reforms are expected to accelerate in the coming years. The reforms will continue to make the Chinese financial system more efficient and liberal, opening up more opportunities to the world.
Until now, capital flows into and out of China have been subject to investment constraints such as quotas and regulatory restrictions. To deepen the capital market, China is expected to introduce further policy changes, simplify some of its investment programs and improve foreign direct investment opportunities, making it easier for corporations and investors to transact in RMB.
China’s RMB cross-border payment clearing system, CIPS, is expected to be fully operational in 2016. The new infrastructure will provide global liquidity in RMB, and it is expected to integrate in some way with the offshore hubs.
These policy and infrastructure developments should further reinforce the convergence of onshore and offshore RMB and eventually support a move to a freely floating currency.
It is difficult to imagine that RMB will not dominate global financial markets along with the USD and EUR in the not so distant future.