RMB internationalisation

The Chinese are watching a new storm unfold in their financial markets, only months after being bombarded with news of their country’s “historical victory” when the renminbi was designated an official reserve currency under the IMF’s SDR regime in November.

Inclusion in the SDR has turned out to be a pyrrhic victory, as China’s capital outflows have only accelerated. China lost as much as $108bn in foreign reserves in December, despite a record trade surplus of over $60bn. From a peak of nearly $4tn a year and a half ago, it is now left with $3.33tn in foreign reserves. Read more

The recent inclusion of the renminbi in the IMF’s Special Drawing Rights is a major victory for the People’s Bank of China, which for years has claimed that the Chinese currency deserves to be in the club of top reserve currencies.

It is also a victory for the Europeans, who after the global financial crisis departed from the tough line advocated by the US, arguing that the RMB should be included in the SDR even though China applies controls on its capital account and intervenes massively in the exchange rate. The view in Berlin, Paris and London is that China has implemented a number of liberalising reforms over the past years, which should be rewarded and further encouraged. Read more

The move to confer reserve status on China’s currency is part of a process that could lead to nearly $3tn being injected into the country’s bond and equity markets. We’ve taken a close look at where the money could come from.

On its own, the inclusion of the renminbi in the International Monetary Fund’s basket of reserve currencies, known as the Special Drawing Right (SDR), could lead to capital flows of $30bn into China within the next 12 months. Read more

In all likelihood, the IMF will announce next month that the renminbi is set to become one of the currencies – along with the dollar, euro, yen and sterling – used by the Fund to underpin the Special Drawing Right, or SDR, its own reserve asset. As a result, the RMB will be informally crowned with the status of a ‘reserve currency’. But what exactly is in it for China?

In the near term, the biggest pay-off for China is that reserve status for the RMB could act as a catalyst for capital inflows from the world’s central banks, who might be tempted to increase the share of their reserves that are invested in China. Read more

Some 95 per cent of all global foreign exchange reserves are invested in just four currencies: the US dollar, the euro, the yen and sterling. The central banks of the ‘Big Four’ are all expanding their balance sheets or have been doing so for years with no sign of immediate reversal. They are all trying to convert huge debt problems into inflation problems, and when they succeed their currencies will weaken sharply.

In this currency war, EM central banks risk suffering the most collateral damage. Their reserves – so many of them held in the big four currencies – will be decimated in purchasing power terms. The world will become desperate for alternative currencies to act as replacements for the traditional reserve currencies once their currency debasement efforts really take root. Read more

The International Monetary Fund will hold discussions in May and make a decision in November on whether to add the Chinese renminbi to the four currencies it uses to value its Special Drawing Right (SDR), the international reserve asset created by the Fund.

China is keen for this to happen, as the deputy governor of its central bank, the People’s Bank of China (PBoC), reiterated at a press conference in Beijing on Thursday. There is a snag: the renminbi is not and may never be a convertible currency, which is a standard pre-requisite of a reserve currency. But as David Lubin of Citi Research argues in a note also published on Thursday, that consideration is likely to be put aside. Read more

By Jukka Pihlman of Standard Chartered Bank

The Chinese currency’s path to internationalisation has been stellar so far but something may happen next year that could propel the renminbi (RMB) into the currency stratosphere.

The IMF’s Special Drawing Rights (SDR) – the IMF’s ‘virtual currency’ based on a basket of other currencies reviewed every five years – rarely warrant much excitement. But if the RMB gets included in 2015, alongside the dollar, euro, pound and yen, it could boost the Chinese currency’s fortunes overnight. Read more

By Christina Ma of Goldman Sachs

China is about to set another milestone in its long journey of financial market liberalisation. The Shanghai-Hong Kong Stock Connect, to be launched on November 17, will for the first time allow international investors to trade shares directly in China’s stock market without applying for an individual quota.

Although the programme will initially cover select stocks listed on the Shanghai exchange, its implications are significant. By providing direct access to the Chinese market, it essentially knocks a hole in the Great Wall that has historically separated shares for domestic investors and shares made available to international investors. More importantly, Stock Connect paves the way for China’s stock market to debut on the stage of international relevance, something that has eluded it despite its massive $4.8tn market capitalisation. Read more

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.

Last week, data showed that the renminbi had overtaken the euro in the world of trade finance, something we thought looked a little out of place with real trade settlement.

On Tuesday, a fresh sign of fishiness appeared, after Chinese industrial production came in below expectations. Read more

By Simon Rabinovitch and James Fontanella-Khan

Just two weeks on from George Osborne’s promise to accord special treatment to Chinese banks to draw them to London, one of the biggest has inaugurated its new European headquarters – in Luxembourg.

The opening of China Construction Bank’s European office in Luxembourg is a reminder that for all the controversy surrounding Osborne’s regulatory concessions, there is still a big question about how successful he will actually be in persuading Chinese banks to scale up their London operations.

 Read more

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. Read more

So, ICBC is to become China’s first mainland bank to issue an offshore renminbi bond in London. The launch, which should take place next month, is a further milestone in the development of the renminbi as an international currency, and demonstrates London’s growing role as the European time zone centre for renminbi tradingRead more

When Gao Hucheng, China’s minister of commerce unveiled the Shanghai free-trade zone (FTZ) in a low-key inauguration ceremony on September 29, those who had been overexcited by the prospect were tempered, and those who were afraid of it felt relieved – at least for the time being.

Why? The lack of big names at the event. Read more

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. Read more

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. Read more

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”. Read more

Taiwan’s financial services industry enjoyed a landmark moment this week when cross-border renminbi trade settlement services were officially launched in the island state. The prize: the chance to create an offshore RMB market in Taiwan to mirror that of Hong Kong. Read more

The dim sum bond market is one where “firsts” seem to come along with alarming regularity. It’s hardly surprising – the market is only three years old. But many of those firsts are either technical, incremental or, frankly, not that interesting.

However, here’s a potential new thing that looks well worth some attention: the first non-Chinese government body to raise money with a dim sum bond. Read more

As China grows in economic and political influence, Beijing is determined to turn the renminbi into an international force that might one day rival the US dollar as the world’s most important currency. The FT’s Simon Rabinovitch examines the motives and methods of the internationalisation of the RMB.