OREANDA-NEWS. June 05, 2013. The renminbi is on course to become a major currency and financial centres around the world are eager to win a share of the business. More than 150 countries and territories now conduct business in renminbi (RMB) in a typical month. HSBC expects about one third of China’s trade to be settled in renminbi within three to five years.

China is a giant of global trade. Between 1980 and 2012 the country’s share of total trade in goods and services rose from 1 per cent to 12 per cent.

Outside mainland China, Hong Kong dominates renminbi activity with an estimated 80 per cent share in payments made in RMB. London and Singapore are likely to follow Hong Kong as hubs for the currency, while Taiwan is also building its renminbi markets.

The ‘internationalisation’ of China’s currency requires a number of stages to take place. It cannot be imposed overnight, like the euro, which was adopted by a group of nations in January 1999, replacing the German mark, French franc and ten other European currencies, and soon acquired the status of a major reserve currency.

Adoption of the renminbi will be more gradual. Its progression will depend on the pace of reform in China, as the country seeks to open up its markets to international investors, progress with domestic financial sector reforms, and facilitate the use of its currency globally.

Renminbi liberalisation
At HSBC, we see liberalisation of the renminbi taking place in three phases. Stage one is its emergence as a global trade currency, where there has already been significant development.

China is a giant of global trade. Between 1980 and 2012 the country’s share of total trade in goods and services rose from 1 per cent to 12 per cent. Yet until 2009 rules prevented companies from choosing renminbi to settle their trade. Since then, these restrictions have been progressively scrapped, and the currency’s share of global trade is growing rapidly as companies in China and overseas become more familiar with the new rules.

The second phase of development is seeing renminbi become established as currency for cross-border investment and financing. Companies with operations in China may now make capital investments, agree ‘shareholder loans’ to subsidiaries, and even arrange cross-border bank loans in the currency. This, coupled with other pilot reforms, is making doing business in China increasingly convenient for companies with global operations.

Financial market liberalisation, too, is gathering pace, as more foreign investors are allowed access to China’s capital markets. Last year the Qualified Foreign Institutional Investor rules that allow certain foreign institutions to invest in China were relaxed, and in March 2013 China also opened its interbank bond market more widely to foreign investors.

Reserve currency
Stage three of internationalisation is for renminbi to become a significant reserve currency. A reserve currency is one held by governments and institutions as part of their foreign exchange reserves. It also tends to be an international pricing currency for products traded on a global market, and commodities such as oil and gold.

At the end of April, Australia said it would invest 5 per cent of its foreign currency bank reserves in Chinese sovereign bonds. Central banks in Russia, Saudi Arabia, Thailand, Nigeria and Venezuela have also started accumulating renminbi reserves in the form of cash and bonds. Nevertheless the renminbi’s reserve status is a prospect for the long term. In the medium term, full convertibility, which means companies can freely convert renminbi into other currencies, is the next essential step towards becoming a truly global currency.

As this process develops, several of the world’s financial capitals have sought to establish themselves as centres for renminbi business as they welcome the currency on to the world stage.