By Jukka Pihlman, Standard Chartered
Adopted at pace by central banks around the world, China’s renminbi is now seen by many as a de facto reserve currency – and well on the way to becoming an official one.
Central banks have caught the renminbi fever, and are showing strong interest in investing part of their foreign-currency reserves in the Chinese currency, with more than 50 central banks now actively doing so either onshore or offshore.
Uptake is strongest in Asia, Africa and South America – regions with fast-growing trade and investment links with China – but even in Europe central banks are busy allocating reserves to the renminbi.
China’s renminbi is becoming more attractive, despite not being freely traded. Hayden Briscoe, head of Asia-Pacific Fixed Income with AllianceBernstein, discusses with the FT’s John Authers why the currency is growing in popularity, and the risks and opportunities this opens.
It is the monetary equivalent of what Chairman Mao called “bombarding the headquarters”. China’s renminbi is rapidly displacing the US dollar as a trading currency not only in Asia and Europe but now also in the US home market.
The value of renminbi payments between the US and the rest of the world rose by 327 per cent in April this year from the same month a year ago (see chart) as more US corporations switched to using the Chinese currency to pay for imports from China, according to data from SWIFT, the international currency settlement firm.
By Michael Pettis of Peking University
Recently a number of economists, most of them foreign, have called for China to devalue the renminbi, arguing that the more than 30 per cent revaluation since 2005 has left it with an overvalued currency. This, they claim, has hurt Chinese exports and is holding back economic growth.
They are probably wrong about growth and almost certainly wrong about their evaluation of China’s currency regime. The policies of the People’s Bank of China (PBoC) reflect a domestic debate that is as much political as it is economic.
By Jan Dehn, Ashmore
China is in the midst of a storming change. Interest rate liberalisation is coming as China prepares to let the bond market play an ever-greater role in macroeconomic policy.
The export-led growth model of the past few decades is no longer fit for purpose. As the largest holder of foreign exchange reserves, China will be more impacted by the unwinding of global imbalances than any other country.
Quite simply, China is adapting to the world of tomorrow, instead of merely languishing in yesterday’s land of denial.
Even when China’s growth rate was falling, the renminbi continued to chug higher. This year’s emerging market sell-off barely caused a ripple, either.
Yet now, when China’s economy appears to be humming again (for now), BofA-ML has decide to come out with a relatively bearish note the currency.
The Chinese renminbi marched to a record high against the US dollar on Thursday, adding to a recent burst of appreciation and spurring talk that Beijing is poised to soon let the currency trade more freely, reports Simon Rabinovitch.
Over the past three weeks the renminbi has gained 0.6 per cent against the dollar, an unusually fast rise for the tightly controlled Chinese currency and one that has come even as the dollar has been relatively strong.
Dim sum bonds showed signs of fatigue last year, despite their young age. Issuance of offshore renminbi bonds grew compared to 2011 – but only by a whisker, while a summer sell-off in the Chinese currency prompted a spike in borrowing costs. On both counts, it was a far cry from the market’s early days of breakneck growth and barely visible coupons.
But 2013 has begun on a more steady footing, with growth returning and yields falling once again. And soon the market will get a further boost – with the launch of benchmark index products.
By Eswar Prasad and Karim Foda
Last year was a calm one for the renminbi. China’s trade and current account surpluses fell below 3 per cent of GDP in 2012, suggesting that the economy was on its way to resolving its protracted external imbalances. Capital inflows eased off and capital outflows rose as the government liberalised controls on outflows. Net accumulation of foreign exchange reserves was just over $130bn, compared to $330bn in 2011 and an average of nearly $450bn per year in the four years preceding that.
But the surge in reserves in the first quarter of 2013 has put the renminbi is back in the spotlight. Rising capital inflows have led to a surge in accumulation of reserves as China’s central bank has attempted to fend off pressures for the renminbi to appreciate.
It’s been nine months in the making. But on Tuesday Brazil and China finally sealed a R$60bn ($30bn) currency swap that was first proposed at last year’s Rio+20 earth summit.
While the swap carries enormous geopolitical and diplomatic symbolism – it essentially represents a monetary consummation of the growing trade between the two giants – in practice though, it will change little.
It’s been a good nine months in gestation, so maybe next week’s Brics summit will be the right moment for China and Brazil to deliver their promised Rmb190bn ($30bn) currency swap.
Hong Lei, China’s foreign ministry spokesman, hinted as much on Friday when he said an agreement would be signed “soon”.
International banks are likely to jump at the opportunities offered by China’s latest move to liberalise the renminbi – this month’s decision to open the Renminbi Qualified Institutional Investor (RQFII) programme to non-Chinese financial companies in Hong Kong.
That in turn will allow them to offer renminbi-denominated funds to their clients around the world. This is a big change – until now only Chinese brokers and asset managers have been able to offer these services.
The Bank of England on Friday threw its weight behind efforts to develop London as an offshore renminbi centre with a declaration that it’s ready to enter into a foreign exchange swap agreement with China’s central bank.
The UK would join a growing number of countries with swap arrangements, including Russia, India, Brazil and Japan. Britain would be the first developed western nation on the list – but others won’t be far behind.
China has approved the first batch of cross-border renminbi loans with Hong-Kong-based banks lending a total of Rmb2bn ($320m) to companies in the ultra-modern Qianhai district of Shenzhen.
The scheme is part of Beijing’s programme to gradually liberalise the currency and China’s financial system. As China Daily reported on Tuesday, “Qianhai is a $45 billion ‘mini-Hong Kong’ project approved in June to test, among other things, freer yuan use and capital account convertibility.”
From time to time concerns are raised that Hong Kong could one day be eclipsed by financial centres on the Chinese mainland, notably Shanghai. But such fears are overblown according to a new report from HSBC’s Donna Kwok, which says Hong Kong has quite enough advantages to avoid being put in the shade any time soon.