The RMB will join the IMF’s Special Drawing Rights basket alongside the US dollar in October 2016

The journey of the renminbi (RMB) as a trade and investment currency over the past decade has been rapid and remarkable. Now it is approaching its final frontier: full convertibility, supporting its transformation into a currency used worldwide in the same way as the US dollar is today.

In December, China began publishing a new index measuring the RMB’s performance against a basket of trade-weighted currencies, highlighting that it was no longer pegged to the US dollar. Last August, China announced a change to the USD-RMB fixing rate, introducing more market orientation into the exchange-rate mechanism. And on 1 October this year, the RMB will join the IMF’s Special Drawing Rights basket of leading reserve currencies. Its weighting in that basket will be behind the dollar and the euro.

The renminbi is approaching its final frontier: full convertibility

In other areas, such as usage in international payments, the RMB trails the British pound and the Japanese yen. But two powerful engines will continue to propel the RMB’s internationalisation. The first is the Chinese authorities’ commitment to capital account liberalisation; the second is China’s economic transformation.

Over the past few years, China has gradually opened up its capital markets to foreign investors. Schemes such as the Shanghai-Hong Kong Stock Connect and the Renminbi Qualified Foreign Institutional Investor scheme are increasing the size of the foreign investor base permitted to trade in China’s capital markets.

Foreign holdings of onshore RMB-denominated bonds and equities remain miniscule when compared with the size of China’s bond and stock markets – but further reforms will change that.

London-listed RMB bond

HSBC and Bank of China acted as global lead managers for a RMB3 billion bond issued by China’s Ministry of Finance in the UK. The bond, which will be listed on the London Stock Exchange, is China’s first internationally syndicated sovereign bond issued outside Greater China.

China is looking to further internationalise its currency and the transaction underlines the growth of the renminbi bond market outside China as well the growing importance of London as an RMB business hub.

In February 2016, the China Interbank Bond Market was opened up to medium- and long-term institutional investors such as foreign banks, insurance companies and pension funds. The move, which could pave the way for sizable foreign portfolio inflows, followed an announcement in July 2015 that made it easier for foreign central banks and sovereign wealth funds to buy onshore Chinese bonds.

These measures reaffirm China’s commitment to capital account liberalisation.

Meanwhile, China’s economy is expanding at a more normal pace – 6.9 per cent in 2015 despite a slowdown in export growth – but it is still one of the fastest-growing major economies in the world.

The recently-adopted 13th Five-Year Plan aims to keep annual GDP growth above 6.5 per cent from now until 2020. This, combined with government initiatives such as “Belt and Road” infrastructure investment, and efforts by Chinese corporations to expand beyond mainland China, should ensure that the RMB’s role in world trade and investment grows.

An estimated 26 per cent of China’s trade in goods is already settled in RMB. For now, the lion’s share of this involves trade between mainland China and Hong Kong. The next step will happen when China’s other major trading partners, such as Australia, start to transact a greater proportion of trade with China in RMB.

This is crucial, as the growth of the offshore market paves the way towards ever-greater international usage of the RMB – in everything from cross-border payments to investment products for ordinary savers around the globe.

The ultimate measure of the RMB’s “normality” will be when it begins to be used in transactions that do not even involve China.

There is still some way to go, but by staying on its path the RMB will become a truly global currency.

This is an edited version of an article first published in the Hong Kong Economic Times, 8 April 2016.

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