China’s currency, the renminbi, is expected to develop as a major currency for world trade though at the moment it is not widely used outside China. Here are the facts:
What is it?
The renminbi (RMB) has been China’s currency since 1949. The name means “people’s currency”. The renminbi is the official name of the currency, but in China people call currency units yuan: “This costs 20 yuan.” Some liken this to the way British people talk of “sterling” formally and “the pound” conversationally.
What is it worth?
About 16 US cents, or more than 10 pence in sterling, or just under 13 euro cents. The US dollar (USD) has traded recently at about 6.21 RMB, the euro at 8.02 and sterling at 9.40.
Is the RMB rising or falling?
Over the past 10 years, it has risen by more than 35 per cent against the dollar and sterling, and about 10 per cent against the euro.
A survey by HSBC found that more than 50 per cent of Chinese companies said they were willing to offer discounts to customers using RMB
Between May and mid-July last year, the RMB fell by more than 1 per cent against the US dollar. It has since risen and is up about 1.5 per cent against the dollar year on year.
For years China kept the RMB’s value “pegged” against the US dollar, allowing only modest changes. It is now measured against a basket of currencies, mainly the US dollar, the euro, Japanese yen and South Korean won. The daily trading price of the RMB against the USD is allowed to float within a narrow band of 0.5 per cent. As a result, daily moves are small, but the currency can move by more significant amounts over time.
Is it a popular trading currency?
Use of the renminbi has been increasing since 2009, when China allowed it to become partly convertible in Hong Kong. Currency traders deal in this “offshore” RMB using the code CNH, while the code for the currency traded onshore in China is CNY. As China eases controls, use of the RMB is growing fast. China is encouraging its trading partners to use the renminbi more when paying for imports or receiving payment for exports. In 2012, 12 per cent of China’s total trade (imports and exports) was paid for in RMB, up from 3 per cent in 2010. By 2015, HSBC expects the figure to be about 30 per cent of total trade – equivalent to about USD2 trillion.
To make it easier to use RMB, several central banks in countries that trade with China have made agreements to make the currency more freely available to banks and customers.
Will it become more widely used?
Yes. China is the second largest global economy and the World Bank has forecast it will become the largest by 2030. We expect the RMB to become a top three global currency for trade settlement by 2015 and to be fully convertible in five years.
Marc Auboin, Counsellor with the World Trade Organisation, said: “There is little doubt that in the medium to long term the RMB will become a major currency of settlement in international trade.”
As this happens, the pool of RMB held around the world will grow and those who hold the currency will seek RMB investments, either in China or in “offshore” RMB bonds, shares, investment funds, and so on. This means that the RMB is developing as an investment currency – the second stage of its internationalisation.
Are outside investors interested?
Yes. One way to gain exposure to the renminbi is through offshore bonds – renminbi-denominated bonds traded in Hong Kong. Demand for these has been so strong that China is allowing other offshore centres to develop. Last year the City of London launched its plan – supported by the UK Chancellor George Osborne – to become an offshore RMB centre. In April 2012 HSBC Bank issued RMB2 billion of fixed-rate notes, the first such issue specifically to target European investors. Singapore and Taiwan are expanding RMB business, and other financial centres are likely to follow. Recently, China allowed foreign investors to invest more widely in its interbank bond market – where banks issue bonds to one another.
Will it become a reserve currency like the dollar or euro?
This is potentially the third stage of RMB internationalisation. Central banks still hold about 62 per cent of their declared foreign currency reserves in US dollars and 24 per cent in euros. The dollar's share has dropped from 71 per cent in 1999, as central banks around the world look to other currencies to lessen their dollar dependence.
In 2010, a study by 17 international monetary experts for the Asian Development Bank concluded that in future, a wider range of currencies need to be used in the global reserve system. Several central banks have begun moves to build RMB reserves – including Russia, Saudi Arabia, Nigeria, Thailand, Venezuela, Japan and South Korea.
Does it matter to my business?
Yes, particularly if you trade with China. You may need to improve the capability of your business to make and accept payments in RMB. A survey by HSBC found that more than 50 per cent of Chinese companies said they were willing to offer discounts to customers using RMB.
In addition, increased use of the RMB may make Chinese importers and exporters more competitive, by lowering their costs and exchange-rate risks. In investment terms, you may need to consider the implications of the RMB’s increasing role in the global currency system.
What does China say?
In 2011, China's former President Hu Jintao said the international currency system was “a product of the past”. But he also said that making the RMB an international currency would be “a fairly long process”. Recently, the new Chinese leaders have continued moves to open up capital markets to foreign investors, a necessary step in the process.
What is HSBC’s role?
Decisions on the role of its currency are China's prerogative. As a global leader in trade finance, we are helping to internationalise the currency, and as the biggest bank in Hong Kong and the leading international bank in China, we are well placed to do so.
HSBC is the leading international bank for the RMB worldwide. We were the first foreign bank in China to underwrite RMB government bonds. We are playing a leading role in developing the offshore RMB markets. We were the first international bank to offer RMB current accounts and cheques, and the first to complete RMB cross-border trade payments in six continents. We have issued RMB bonds for China's Ministry of Finance and for leading international companies including Volkswagen, BP, Lafarge, Air Liquide, Tesco, Pacific Andes Resources Development, Genting Hong Kong and China National Petroleum Corporation. We are the leading foreign bank in cross-border RMB payments and in RMB licences and capabilities.