Don’t laugh at de-dollarisation talk
Recent comments about the de-dollarisation of financial markets and the wider adoption of the renminbi by countries like Russia have been met with incredulity in some quarters. But while the dollar will retain its reserve currency status for many years to come, the fact such talk exists shows how far the RMB has come in a very short time.
Talk of reducing the dominance of the dollar in international capital markets is a subject that market watchers are used to hearing once in a while. Usually it crops up because one country or other has felt itself a victim of US hegemony.
This time around the calls have come from Russia and France — the former in the wake of sanctions against it amid the political and military tensions in Ukraine, the latter after the US imposed a record $8.8bn fine on French bank BNP Paribas for doing business in places the US doesn't like.
But one new feature of the recent speculation, especially in relation to Russia, has been the suggestion of increasing the use of the renminbi for trade.
Anyone who knows anything about China’s attempts to internationalise its currency knows that the renminbi is a long way off replacing the dollar. While Russian companies could quite easily denominate all their trade with China in renminbi if they wanted to, restrictions remain on the ability of companies to move the currency in and out of China, making it a less than effective tool for managing global treasury operations.
In addition, the renminbi is unlikely for the moment to be accepted in any great way by non-Chinese companies, where the dollar remains the easiest currency in which to conduct global business.
Even the most optimistic estimates don’t think China’s currency will be truly international until 2017, and that would still be a long way from being a reserve currency. It’s generally thought that it took the US about 70 years to get the dollar to make that same journey.
But the fact the renminbi has even been mentioned in the context of these discussions shows that the Chinese have done an effective job in getting their currency onto people’s radars.
The growth of use of the currency outside China’s borders has been phenomenal – although admittedly from a small base. According to Swift, as of May the renminbi was the seventh most used payment currency in the world, with a 1.47% share. To put that into context, it was ranked at just 13th a year earlier, with only a 0.63% share.
Perhaps more tellingly, Swift also reckons that the renminbi is now used for 23% of all Asia Pacific payments to China and Hong Kong. In the eurozone that figure is 29%, rising to 58% in the Middle East and 66% in Latin America.
And governments have been quick to realise the benefits of becoming a hub for the renminbi. Proximity means that it is perhaps less noteworthy that Asian cities like Taipei, Singapore and Seoul are positioning themselves to capture renminbi business. But the major financial centres in Europe, including Frankfurt, London, Luxembourg and Paris, have also been falling over themselves to secure renminbi investment quotas, clearing banks and other goodies from the Chinese.
All of which adds up to a rapidly changing profile for the currency. It would be a stretch to imagine that the dollar had much to fear from a few disgruntled nations choosing to depend on it a little less.
But combine that disgruntlement with the much bigger drivers of many other countries seeing the advantages of putting their eggs into the RMB basket — whether in the hope of being a market supremo, like the UK, or slashing the costs associated with already huge trade figures, like Germany — and a world in which the dollar plays a smaller role doesn't seem so far-fetched.