China’s central bank announced on Thursday (January 13) that local enterprises can now use the renminbi to launch businesses or fund acquisitions overseas on a trial basis.
The announcement marks another important step towards expanding the currency’s role in the global economy. The go-ahead came one day after US Treasury Secretary Timothy Geithner urged Beijing to appreciate the renminbi’s value against the US dollar faster, and a week before Chinese President Hu Jintao visits Washington.
The scope of the programme, described as a pilot, will be limited. Although there is no stated limit on the investment size, only non-financial enterprises registered in regions approved under the renminbi cross-border trade settlement scheme are eligible.
Foreign firms that receive renminbi, otherwise known as the yuan, in payment will have just a handful of options on how to use it.
Aside from buying Chinese goods they would only be able to store the currency in low-yielding bank accounts, invest it in a relatively small number of renminbi-denominated assets or swap it for other currencies, since Beijing still maintains strict capital controls and restrictions on currency trade.
Last July China started to use Hong Kong as a testing ground, encouraging international companies and investors to hold and trade renminbi-denominated products. The so-called dim sum bonds (offshore renminbi bonds) are a part of that plan.
The city’s renminbi deposits had reached Rmb280 billion (US$42.5 billion) by the end of November, rising fourfold from Rmb90 billion in June.
HSBC predicts that in three to five years at least half of China’s trade flows with other developing economies, or roughly US$2 trillion, will be conducted in renminbi, making the renminbi one of the top three global trading currencies.
Yet as the currency continues to accumulate offshore, Beijing will also find it increasingly difficult to keep a tight grip on its capital account and prevent unwanted capital from pouring in.
“In order for renminbi to be widely used, the country will need to provide foreigners holding renminbi with more investment models, and over time it needs to open up its own onshore market as well,” said Qu Hongbin, HSBC’s Greater China chief economist in a press conference on January 14.
The scheme certainly provides another channel for the supply of renminbi in offshore markets. It encourages the subsequent use of the currency beyond China’s borders and reduces the country’s reliance on the US dollar.
But it is still a baby step towards the final destination of creating a truly international currency.
In the longer term, China will still have to open up its own financial market, grant investor access to mainland bond markets and let the renminbi freely trade on the international foreign exchange market if it is to become the world’s new global reserve currency.
The powers that be in Beijing remain many years away from being comfortable enough to open their economy up to those sort of changes. For all its positive moves in the past two years, China remains a very long way from possessing a truly international currency.