The Chinese government’s efforts to internationalise the renminbi (RMB) will accelerate as US dollar funds flee Asia in search of higher yielding assets in North America, forcing China’s currency to fill the void, experts have said.
China’s desire to turn the RMB into an international trade currency is well documented. Top officials have for years been carefully laying the groundwork for its future role as a reserve currency, encouraging mainland state firms to issue debt offshore in yuan, creating RMB trading floors around the world and agreeing bilateral currency swaps between the People’s Bank of China and central banks from Australia to Malaysia.
Foreign issuers, meanwhile, continue to test the waters. German state development bank KfW this week became the latest foreign institution to issue renminbi-denominated debt, pricing RMB1bn ($162m) in two-year bonds in Frankfurt.
Li-gang Liu, chief China economist at ANZ in Hong Kong, said the next step would be to channel the mainland’s currency into regional infrastructure programmes across Asia, as the region’s dependence on — and loyalty to — the US dollar waned.
Liu said the US Federal Reserve’s systematic reversion to a tighter monetary policy, likely from mid-2015, which would suck dollars out of Asia.
“This will become a serious issue over the next five years for Asia,” he said. “As US bond yields normalise, and as the differential between US and Asian bonds disappears, North American funds will repatriate to US markets.”
Only China can fill that hole, he added. “China’s investment in the region can offset these outflows. The need for a replacement for dollars will force the renminbi to become far more widely used across Asia.” Experts pointed to a raft of RMB-funded infrastructure programmes already in place, such as the planned high-speed railway linking China’s southwest Yunnan province with Singapore.
“China definitely has the ability to fund such projects,” added Liu. “This will make trade and economic relationships between China and the rest of the region much closer.”
Two-way trade between China and the 10-state Asean bloc is set to hit $500bn this year, a five-fold increase in a decade. Beijing wants to boost foreign direct investment into Asean to $150bn by 2020, from $30bn in 2013, while doubling bilateral trade to $1bn, much of which will be printed in RMB.
Major deals with the region could also be channelled through the $50bn Asian Infrastructure Investment Bank, a new multilateral being created and funded by the Chinese government.
China’s currency still has far to go before it can realistically be considered a regional currency. The offshore RMB market lacks liquidity, while investors have been jolted by the currency’s surprise depreciation this year.
And while the yuan may increasingly be used to settle trades across Asia, that fact alone, warned Changyong Rhee, director of the International Monetary Fund’s Asia and Pacific Department, “is not the same thing as being an international reserve currency.
“If the RMB is to become an international reserve currency, China would need to open its capital account and achieve full convertibility, but it is not ready to do that. The RMB could be used increasingly for trade settlement, and for infrastructure financing without full convertibility.”