By Anthony Harrington
In June 2011 there were 900 banks around the world that offered their customers the opportunity to settle transactions with Chinese firms in renminbi. By July 2013 that number had swelled to 10,000. A more than 10-fold increase in two years is remarkable testimony to the speed with which China's "closed" currency is becoming open. In a recent speech, Dr. Joachim Nagel, a member of the Executive Board of the Bundesbank took up the topic of the internationalization of the renminbi. Partly his aim was to reinforce Frankfurt's claims to becoming a center for renminbi trading, which need not concern us particularly, other than to note that cities like Frankfurt are forward thinking enough to want to hitch at least part of their status as financial centers to the ability to trade renminbi.
Just in case there is any confusion out there, this does not mean that the Chinese have decided to abandon currency controls. These are still very much in place, at present, but the Chinese government is working towards full liberalization of the currency, Nagel says, just as soon as it feels that China's emerging capital markets are wide enough and deep enough to cope. In particular, by opting to use Hong Kong as an offshore currency market with more direct trading rights than it allows in its domestic market, the Chinese government is actively promoting the gradual internationalization of the renminbi. At present some 80% of offshore renminbi trade is settled in Hong Kong, but Nagel says that the authorities are now planning to extend the scope of China's offshore market by broadening its geographic base well beyond Hong Kong. Since July 2012, some 4% of renminbi trade has been conducted in London and in Singapore. Both Singapore and Taipei now have a Chinese commercial bank acting as a clearer for renminbi transactions. Frankfurt, according to Nagel, wants to set itself up as a renminbi trading center in Europe, and may very well get its wish.
The Bundesbank welcomes all these initiatives and sees them as a step in the right direction, towards the free movement of capital, Nagel says.
However, Jonathan Batten and Peter Szilagyi, in an article entitled "The complicated path of RMB Internationalisation" for the think tank, The Swift Institute, point out that calculating the pace of renminbi internationalization is a tough call, since there are a number of complicating factors. Trade settlement figures, as collected by the Bank for International Settlements (BIS) are one way of mapping the progress of China's currency towards international reserve currency status, there are other factors such as growth in securities purchases and sales, as well as offshore bank deposits and loans and bond issuance.
RMB settlement for 2013 should be around 15% of international trade settlements (i.e. trade settled in renminbi rather than in US dollars), and this would be up from the peak of 12% of trade flows in 2011. But foreign investors buying renminbi denominated bonds issued by Chinese companies has become a growing factor.
(Corporate bonds) provide opportunities for investors to benefit both from diversification of credit and possibly foreign exchange risk, as well as a reduction in asset concentration. Longer term it provides opportunities for investors to become familiar with Chinese borrowers, whose credit status and standing was previously unknown. These processes would seem particularly important if the Chinese authorities would eventually like these same foreign investors to be present in the domestic financial system.
South Korea leads corporate issuance in the Asia-excepting-Japan arena, with China in second place but catching up fast. South Korean companies have some US$171.4 billion in outstanding bonds, China has US$154.3 billion, as of September 2012. Much of the increase follows from a "liberalization" in 2010 that allowed foreign firms and non-financial Chinese corporations to issue RMB bonds. The total issuance by Chinese issuers now constitutes around 4.3% of the total global corporate bond issuance (7.6%, the authors say if Taipei and Hong Kong are added to the China total). The authors point out that despite the increase in foreign participation in Chinese bond issuance in RMB it is no easy matter to extrapolate from issuance data to gain any reliable view on when, exactly, the RMB is likely to become a true international reserve currency. You can say it is very likely to happen, but you surely can't say when...