The Chinese authorities are continuing to accelerate the pace of financial reform. The recent liberalisation measures will help facilitate the integration of China’s currency into the global economy.
But the internationalisation of the renminbi (RMB) is only one piece in a much larger jigsaw of economic reforms. The largely state-controlled “socialist market economy” served China well through its first stage of industrialisation when the advantage of cheap labour made investment decisions relatively simple. However, this has created complexity.
The capacity of the renminbi to reshape the global economy is evident
There is much debate over whether China has passed the point when a labour surplus becomes a labour shortage, but what is clear is that labour is becoming more expensive and future growth will have to come from increased productivity, which governments have historically failed to find.
The new administration of President Xi Jinping and Premier Li Keqiang should be applauded for recognising that market discipline will be key to promoting long-term growth, even if there is a short-term slowdown.
“Reform is about cutting government power,” Premier Li said earlier this year. “It is a self-imposed revolution that will require real sacrifice, and it will be painful.”
Leading the broader reform programme is the internationalisation of renminbi, a three-stage process of establishing it as a global trade settlement currency; then as a global investment currency; and potentially a global reserve currency.
The capacity of the renminbi to reshape the global economy is evident. The Chinese authorities started to free it up for trade settlement just four years ago. In 2012 it accounted for about USD422 billion in trade settlement, or 12 per cent of China’s overall trade, and we expect that figure to increase to 30 per cent by 2015, which would make it the world’s third largest settlement currency after the euro and the dollar.
The renminbi’s role as an investment currency is also growing, but has been capped by limited access to Mainland capital markets and a lack of depth offshore. The People’s Bank of China has expanded its Qualified Foreign Institutional Investor scheme and the RMB-denominated RQFII, which offers international investors a quota for access to domestic markets, but the full global potential will not be realised until many of the current capital controls have been removed.
This programme of reform will help the currency to make its impact felt, both within China and across the globe.
A version of this article originally appeared in the South China Morning Post on 26 August 2013.