History is full of poor predictions – from the economist Irving Fisher’s declaration that stocks had reached a “permanently high plateau” just before the 1929 Wall Street Crash, to Ken Olsen, inventor of the minicomputer, proclaiming in 1977 that “there is no reason for any individual to have a computer in their home”, or Decca Records rejecting a new band named the Beatles on the grounds that “guitar groups are on the way out”.
By contrast, the prediction that the 21st century will be defined by the rise of China seems much more certain. Three decades of reform have propelled China to become the world’s second largest economy, largest exporter and most popular destination for direct investment. This trajectory is set to continue in the coming years, despite slower-than-expected growth figures for the first quarter of 2013. China is set to become the world’s largest economy. But, so far, one part has been largely missing from this picture: China’s currency.
The renminbi is increasingly part of normal day-to-day business for anyone trading with or investing in China
The rise of a country’s economic power is usually matched by the international acceptance of its currency – the British pound dominated the 19th century, the US dollar dominated the 20th, joined latterly by the euro. Yet until four years ago China’s currency, the renminbi (RMB), had virtually no exposure in the international markets. Strict controls prohibited almost all export of the currency and its use in cross-border transactions. Payments between Chinese companies and their foreign partners were usually conducted in dollars or euros. Despite China’s growing economic presence around the world, its currency rarely left its borders – the “people’s currency” stayed within the People’s Republic.
In 2009 this began to change. Beijing set in train a series of reforms to expand the use of RMB in cross-border trade settlement and improve investment flows, and the effect has been transformative. From a low base the currency is rapidly becoming established on the international stage. More than 150 countries now do RMB business in a typical month; we’ve seen the formation of a thriving offshore RMB market; and the use of RMB for cross-border transactions is growing rapidly. Data from SWIFT, a global provider of financial messaging services, suggests that RMB payments grew in value by 171 per cent between January 2012 and January 2013.
RMB investment opportunities are being created around the world, supported by offshore markets, particularly the offshore bond market. But RMB investment channels on the Chinese mainland have also been opening up. New schemes are enabling greater foreign investment into the securities market and reforms to the rules governing capital flows are allowing foreign businesses to invest, to buy other businesses and to build or buy factories and other facilities on the Mainland. In 2011, 12 per cent of FDI into China was made using RMB. In 2012, it was 35 per cent.
The renminbi is increasingly part of normal day-to-day business for anyone trading with or investing in China. At HSBC, as the leading international bank for the RMB, we think the currency will continue to grow in importance. We expect the RMB to become a top three global trade currency, in volume terms, by 2015, and we expect it to be fully convertible within five years, taking China’s financial integration with global markets to a new level.