Just sometimes, there comes a moment in sporting events or seasons where the onlooker is able to spot a defining event taking place amid the general mayhem. A cyclist swoops off the front of the pack and wins a stage; a soccer player scores (or misses) a key penalty; a base is stolen, allowing a struggling baseball team to bat in two runs. Look hard enough, and it’s there.
The same thing recently occurred with China’s laborious, sometimes seemingly haphazard efforts to turn the yuan or renminbi (Rmb) into a genuinely global currency.
In this case, though, it wasn’t a single moment but a series of quick-fire events which, when totted up, pointed to a genuine step-change in the development of a legal tender that could be set to define this century, much as the US dollar did the last one, and sterling the one before.
The first event of note took place on April 8, involving the start of direct currency trading between the yuan and the Australian dollar. This was a big deal for both countries. It extended the reach of the Rmb into Australasia, while making the Aussie dollar only the third currency, after the greenback and the Japanese yen, to be given trading clearance by the People’s Bank of China (PBoC).
And Australia wasn’t done for the month. On April 24, the Reserve Bank of Australia (RBA), which tied up an A$30 billion ($31 billion) swap agreement with the PBoC last year, announced its intention to invest A$1.6 billion in Chinese state debt. That move will see the RBA place 5% of its A$32.4 billion in net foreign exchange reserves in Chinese sovereign bonds.
Speaking in Shanghai after the announcement, deputy RBA governor Philip Lowe insisted that, so long as China continues to open up its capital account, the yuan was on track to becoming “one of the major reserve currencies of the region.” Lowe said the decision to invest was an “important one” reflecting the “broader economic relationships between China and Australia”. Another key event – smaller in scale perhaps, but just as emblematic of the link between China’s economic rise and Beijing’s desire to assimilate the Rmb into global trade patterns – had taken place a few days before in Singapore, a city keen to present itself as a key market for yuan trading and clearing, second only to Hong Kong outside the mainland.
This was no pint-sized coup: the deal will allow the PBoC and the Singapore branch of Industrial and Commercial Bank of China (ICBC), Beijing’s largest lender, to offer Rmb clearing services in the Lion City for the first time. Bank of China previously launched yuan clearing services in Hong Kong and Taiwan, but this marked the first such deal outside Greater China.
Hong Kong, though, took the medal when, on April 25, the Monetary Authority scrapped limits on net open positions and liquidity ratios for Rmb – moves that allow for more investment by foreigners in the Chinese currency.
LANDMARK EVENTS
Analysts described these as landmark events. “What happened in Australia will have a significant impact, given the country’s important position relative to the global economy and financial markets, and its strong trade links with China,” says Wang Qinwei, chief China economist at London-based Capital Economics and a former monetary expert at the PBoC. “Add to that the fact that a large amount of international trade with China passes through Singapore, and you have two seemingly disparate events which, when combined, show how far the renminbi has come in a very short time.”
HSBC analyst Paul Mackel says the removal of the limits on net open positions in Hong Kong was “another step towards making the Rmb a truly internationalized and liberalized currency”.
The rolling flashes that punctuated news feeds throughout last month confirm this trend: on April 10, then three days later, and five days after that, the renminbi appreciated against the US dollar to a near two-decade high, driven by market expectations and rising capital inflows. The yuan closed on April 18 at a rate of 6.1776 to the greenback, its highest rate since 1994.
RISING STEADILY
Analysts expect the steady appreciation of China’s currency to continue through at least the next two quarters. On April 17, Wang Yu, deputy director-general of the PBoC’s research department, predicted that the central bank would continue to widen the currency’s trading range against the dollar. The next day, that pledge was reiterated by PBoC deputy governor Yi Gang, prompting Japanese investment bank Nomura to tip the yuan rate in the spot market to appreciate “to around 6.08” in the third quarter. Standard Chartered tips the spot rate to strengthen to 6.10 by the end of 2013.
“The appreciation of the yuan,” predicts Allan Zhang, a renminbi expert and director of advisory services at PricewaterhouseCoopers (PwC), “will continue to trigger further speculation expectations. And every time it strengthens [against the US dollar], it makes the yuan more attractive in the international markets. It’s a virtuous circle for Beijing.”
Indeed, the renminbi’s influence is expanding almost wherever one looks, whether in Africa, Latin America, south-east Asia or Europe. The yuan would almost certainly benefit if a Brics development bank designed to support the emerging economies of Brazil, Russia, India, China and South Africa ever takes shape – particularly if it is located in Beijing or Shanghai. It will also profit from rising qualified institutional investor (QFII – licensed foreign investors allowed to buy and sell shares on China’s stock exchanges) and renminbi-qualified institutional investor (RQFII) quotas, both of which are boosting foreign ownership of mainland-listed “A” shares.
Then there is the broader issue of the shifting nature of global trade. As China does more business with the world, global corporates are getting to know, understand and trust the yuan. Beijing is tacitly promoting this process, encouraging non-Chinese multinationals to settle in the renminbi wherever and whenever possible.
HSBC predicts that $2 trillion-worth of trade transactions will take place between China and the rest of the world within two years. Around 12% of all trade between China and the Middle East was settled in the yuan last year, up from 2% in 2010. That figure, the bank reckons, will jump to one-third of all Sino-Middle Eastern trade by 2015.
Besides these landmark events, there are innovations taking place on a micro level. In the Qianhai enterprise zone, a tiny spot of land over the border from Hong Kong in Guangdong province, a bold experiment has started: the aim here is to allow 15 approved Hong Kong banks to extend commercial Rmb loans to local, onshore mainland Chinese entities. Those loans are likely to be linked, for the first time, to interest rates set “naturally” by the market, rather than fixed to the central bank’s benchmark rate. If all goes to plan, the zone should be adding up to Rmb150 billion ($24.3 billion) a year to China’s economy by 2020.
China’s attempt to create a global currency in its own image is clearly gathering pace. But as Capital Economics’ Wang notes, there remains “much still to do” before the renminbi can feasibly be taken seriously as a global currency.
That Beijing needs to loosen capital controls is a given. But the central bank also needs to “step away from massive interventions”, notes Wang, while further easing controls on bank deposit rates, fostering competition between domestic lenders, and creating a more flexible yuan exchange rate.
If all goes well, however, reckons PwC’s Zhang, the renminbi could become “freely convertible within three years, rivalling [other] hard currencies like the dollar, yen and sterling”.
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