A call for more open capital markets and increased global use of the renminbi was raised by regional trade association ASIFMA, together with Standard Chartered and Thomson Reuters, in a white paper called the RMB Roadmap.
“The thesis of the RMB Roadmap is that China's currency does not currently match its economic heft and it needs to go through a five-step process for this evolution: first, as a deposit currency internationally; second, through increased usage for trade purposes; third, as an investment currency; fourth, through central banks signing more bilateral swap agreements with the PBoC; and finally fifth, global acceptance as a reserve currency. Our white paper examines how and when this will evolve and the challenges it entails,” said Mark Austen, CEO, ASIFMA.
Many analysts and industry experts consider the timing is right for the renminbi to take its place among the leading currencies of the world as China continues to demonstrate its influence and effectiveness on the world economic stage. However, a combination of factors has contributed to a somewhat slower rate of recognition for the Chinese currency and the renminbi is only now gaining traction, the white paper pointed out. Factors that have impacted the extent of the renminbi’s use as a global currency include a relatively closed capital account, under-developed domestic capital markets and the use of the renminbi for trade settlement still lags behind other global currencies.
Further opening of the country’s capital account, a steady rise in the use of the renminbi as an investment currency by international investors and the International Monetary Fund (IMF) recognition of the renminbi as a potential reserve currency through special drawing rights (SDR) are all critical steps towards the greater internationalization of the currency and the liberation of China’s financial markets.
Commenting on the positive outlook for the renminbi, Carmen Ling, global head of RMB solutions at Standard Chartered, said, “The building blocks for renminbi internationalization have stacked up well so far, and the ongoing efforts to further liberalize the currency is very encouraging. With a 2020 horizon, we think that China’s capital account should be ‘open’ by then albeit with some Chinese characteristics. There should be greater and more seamless direct investment flows with global renminbi liquidity facilitating global cross-border trades and payments efficiently. We are optimistic of the Chinese leadership’s resolve to continue with this cautious but bold ambition.”
“The offshore renminbi market was created explicitly to allow the currency to move toward internationalization while the onshore market remains largely separate from the global market,” noted Adrian Gostick, managing director, financial and risk, China, Thomson Reuters. “As capital controls ease and linkages between the onshore and offshore markets grow, the convergence between these two markets is inevitable, albeit at a gradual pace.”
For example, as the dim sum bond market has evolved into a proper credit market rather than just a currency play, spreads between dim sum bond yields and that of onshore bonds have gradually narrowed since the dim sum market opened in July 2010. The average coupon on onshore bonds has moved to 3.2% in 2014 from 2.4% in 2010, while the average coupon on onshore bonds fell to 3.8% in 2014 from 4.7% in 2010.
“Gradual onshore and offshore participation in the renminbi markets by global central banks and investors through the use of swap lines, the Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) programs, the rapidly growing offshore or “dim sum” bond markets and the rise of offshore renminbi centres – Hong Kong being the largest – have contributed to the first phase in the renminbi’s’s internationalization, but there is still a long way to go. The recent announcement of the Shanghai-Hong Kong Stock Connect pilot program is a prime example the evolving and exciting landscape,” concluded Patrick Pang, managing director – fixed income, ASIFMA.