Asia Pacific is likely to see an increase in the establishment in renminbi swap lines between the PBoC and central banks in the region, especially as ties between the Mainland these countries continue to surge.
Before the renminbi is able to witness full convertibility within five years, the PBoC still needs to work on a couple of initiatives in order to boost more cross-border trade settlement in the currency, according to HSBC in a press conference on March 18. One of the methods is to establish more bilateral currency swap agreements between the Chinese central bank and others.
“The PBoC will continue to sign more deals with other central banks as part of the initiative to increase renminbi liquidity, especially in countries that have exporters and importers that are interested in using the currency for trade with China,” said Hongbin Qu, chief China economist at HSBC at the press conference. “In my view, Asia Pacific countries will always be the top priority for the Chinese central bank to look for more deals on that front.”
One of the most talked about locations in terms of gaining a direct swap line with the Mainland is Australia, especially given the increase in bilateral trade between the two countries in the last few years.
Trade between Australia and China was US$114 billion last year, accounting for 23% of Australia’s trade, while the country is China’s fifth-largest source of imports after Japan, South Korea and the US.
Apart from Australia, the PBoC will also look to approve more currency swap deals with Latin American central banks, with Brazil and Argentina being the likely candidates, adds Qu.
Bilateral trade increased about 30% annually since 2001 to reach US$241.5 billion in 2011, while Chinese investment in Latin America totaled US$10.1 billion in 2011, 16.8% of China’s outbound investment last year, according to the State Administration of Foreign Exchange (Safe).
The Chinese central bank now has currency swap agreements with around 20 foreign central banks totalling about Rmb2 trillion (US$320 billion).
In addition to having to establish more swap lines globally, HSBC believes that Chinese authorities would need to launch more offshore renminbi centres and clearing banks, especially one that is not located within the Asian time zone.
“The volume of the renminbi cross-border trade settlement has expanded so quickly that it requires bigger offshore renminbi market in order to facilitate that. As a result, the size of the offshore renminbi market has extended beyond Hong Kong to Singapore, Taiwan in the region as well as London,” said Qu. “New locations will emerge. We need a market in a different time zone like London to facilitate renminbi trade settlement in that time zone. We are going to see the establishment of more clearing banks, for instance in London this year.”
By 2015, one third of China’s exports are expected to be denominated in the renminbi, with annual renminbi trade settlement volume anticipated to hit nearly US$2 trillion. Also, as a result of this redenomination process, the cumulative size of the Chinese currency’s liquidity sitting in offshore centres is forecast to double from current levels to around US$500-US$600 billion by 2015, highlights HSBC.