The day the renminbi becomes a truly ‘normal’ currency isn’t so far off now
Helen Wong tracks the stunning progress the renminbi has made of late to become widely used and fully convertible globally
The renminbi is approaching its final frontier: full convertibility and transformation into a “normal” currency used by companies and individuals worldwide in the same way the US dollar is today. The renminbi’s journey as a trade and investment currency over the past decade has been rapid and remarkable – and with reforms and international usage continuing to grow apace, full convertibility is now in sight.
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Just last December, China began publishing a new index measuring the renminbi’s performance against a basket of trade-weighted currencies, highlighting that it was no longer “pegged” to the dollar. Last August, China announced a change to the US dollar-rebminbi fixing rate, introducing more market orientation into the exchange-rate mechanism.
And on October 1 this year, the renminbi will join the International Monetary Fund’s special drawing rights basket of leading reserve currencies. Its weight in that basket will be smaller than only those of the dollar and the euro, underlining that in some respects the renminbi is already one of the world’s top three currencies.
In other areas, such as its usage in international payments, the renminbi trails not only the dollar and the euro, but also the British pound and the Japanese yen. So clearly, its internationalisation journey still has some way to go.
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But there are two powerful engines that will continue to propel the renminbi along its internationalisation path. The first is the Chinese authorities’ commitment to capital account liberalisation; the second is China’s economic transformation towards sustained growth.
These deregulation measures send a powerful message: China will continue on the path of reform
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 Qualified Foreign Institutional Investor programme are increasing the size of the foreign investor base permitted to trade in China’s capital markets. Foreign holdings of onshore renminbi-denominated bonds and equities remain minuscule when compared to the size of China’s bond and stock markets – but further reforms will change the picture in the years to come.
The latest major change was announced just in February, when the authorities opened the Chinese interbank bond market to “real money investors” – medium- and long-term institutional investors such as foreign banks, insurance companies and pension funds. The move, which could pave the way for sizeable 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 deregulation measures reaffirm China’s commitment to capital account liberalisation, and they send a powerful message: China will continue on the path of reform.
