The Global Renminbi
According to the World Bank, China accounted for 15% of the world's GDP in 2012. However, according to data from SWIFT, an organization that tracks currency transactions, the renminbi accounts for less than 2% of global forex trading.
As China's impact on the global economy rises, the importance of the renminbi will continue to increase. There are signs this is already occurring. According to SWIFT, in the fourth quarter of 2013, the renminbi passed the Euro to become the second most used trade currency, behind the U.S. Dollar.
Becky Liu, Senior Rates Strategist at Standard Chartered in Hong Kong, said, “in the years ahead, China will become an even more important economy in the world. It's already the world's number one import and export country. With the rise of its global market share, we expect more trade to take place in renminbi. Naturally, this will lead to higher investments denominated in renminbi.”
Talking about the future acceptance of the renminbi, Singapore-based Jim Rogers, well-known investor and author of the books Adventure Capitalist: the Ultimate Road Trip and A Bull in China: Investing Profitably in the World's Greatest Market, said, “the renminbi will be convertible and the U.S. currency will be used by fewer people. More and more people will be using the renminbi.”
The renminbi trades within a small band pegged to a basket of world currencies and trading is still significantly restricted. Liu said, “the market and us are looking for further financial reforms to be instituted this year. The currency band is likely to widen and cross-border capital flows is likely to increase.”
Many analysts expect the capital account to open up and for the currency to be fully convertible by 2020, if not sooner. Liu said, “I think the government set a pretty clear agenda for Chinese reform by 2020. During the next 5 to 7 years, we will see interest rate liberalization basically completed.” She also talked about a number of programs the government has instituted such as QFII, RQFII, QDII, and QDII2, which will increase circulation of the renminbi.
China has made a concerted effort to transform Shanghai into a global financial center. Making its currency fully convertible is a useful tool that can accelerate this process. Not only will opening up of the currency impact Chinese cities, it will also create opportunities for other international financial centers. Hong Kong is currently the major cross-border hub for renminbi trading. However, other locations are developing their own renminbi niches.
Singapore and Taiwan have seen increases in the flow of renminbi. And in February 2013, Standard Chartered and the Agricultural Bank of China signed an agreement, which will enable institutions to execute RMB transactions in the U.K. In 2013, China also signed agreements with parties in Germany and Australia to increase the flow of the RMB.
Liu expects to see “more offshore renminbi hubs emerge this year. I don't think they are in direct competition with each other because each has a unique role...There’s still no offshore renminbi clearing center in the America time zone; we could see potential interests coming up there.” With the U.S. not aggressively moving in the direction of becoming a global renminbi hub, other countries such as Canada or Brazil could benefit as there will be a need for renminbi trading after the London markets close.
Liu also talked about the possibility of an RMB center in the Middle East in order to facilitate commodity pricing--particularly oil.
Extending the time horizon further in the future, Rogers does not think trading will be restricted to specific locations. He said, “now, the U.S. dollar is traded everywhere and the renminbi will be, too.”