Although the pace of renminbi internationalization has slowed dramatically, long-term trends still point towards a more global renminbi, says an analyst with the Federal Reserve Bank.

According to Nicholas Borst, analyst at the country analysis unit of the  Federal Reserve Bank of San Francisco, China’s capital markets are expected to open up further and boost the renminbi's bid as a major investment currency.

Moreover, China’s new international payment system will be making the renminbi more convenient for cross-border transactions. “China will also continue to grow as a share of global GDP, albeit at a slower pace, which should over time lead to greater demand for renminbi,” says Borst.

Recent events make clear that the process of renminbi internationalization will be bumpier and longer than many expected, he notes. “When times are tough, investors still flee the renminbi in search of safe harbours. The most recent example is the sharp depreciation of the renminbi during the financial volatility following the Brexit vote. For the time being, the dollar seems secure in its position as the world’s premier global currency.”

The internationalization of the renminbi slowed noticeably after the renminbi has depreciated against the USD and other currencies over much of the past year.

The slowdown in the Chinese economy means that the currency is less likely to return to the heady days of steady and predictable appreciation. In addition, heavy intervention in the foreign exchange markets by Chinese authorities has soured many investors who faced losses after being caught on the wrong side of the trade, he adds. Faced with this reality, investors outside of China seem less eager to accept and hold renminbi assets.

Since its inclusion in the International Monetary Fund’s Special Drawing Rights, many analysts have forecast a significant uptick in the share of global foreign exchange reserves held in renminbi. Unfortunately, it is difficult to construct a time series for this data as information is only reported intermittently and by different sources. Current estimates put the renminbi’s share between 1% and 2% of global reserves. The dollar, euro and pound sterling, by comparison represent 64%, 20%, and 4.8% of foreign exchange reserves, respectively.

 

 

Borst says tracking the renminbi’s role in foreign exchange reserves will become easier in March 2017 when the International Monetary Fund begins separately identifying the renminbi in its official foreign exchange reserves database.