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Not so long ago, international use of the renminbi was limited to cash transactions along China’s borders. Mongolian, Pakistani and Laotian traders accepted wrinkled, Mao-emblazoned notes from Chinese visitors but that was about as far as it went.
No longer: over the past three years, the renminbi has started to go global. British hedge funds buy and sell the currency at the push of a button, while corporations such as McDonald’s, the fast-food chain, and Tesco, the UK supermarket group, raise funds in the small but fast-growing renminbi bond market.
Even George Osborne, UK chancellor, is getting excited. Last month he launched an initiative to help the City of London develop into a “western hub” for the renminbi as China’s foreign exchange controls are relaxed.
While the steps so far have been small and incremental, many people believe that the renminbi could ultimately challenge the US dollar as a global reserve currency. If this proves to be correct, its ascent will have big effects on trade, investment and politics across the world.
Pierre Gave of Gavekal, a Hong Kong-based research group, predicts the renminbi will become a major currency for trade between China and its Asian neighbours in the coming years, before spreading across the world.
“The Asian region needs to get rid of its dependence on the US dollar as a trading and finance currency,” says Mr Gave. “The renminbi is the only credible alternative.”
It was just three years ago that Beijing first permitted Chinese companies to settle their import or export bills in renminbi. Previously they could only use foreign currencies, mainly dollars.
The pace of change has already been substantial, albeit from a low base. Trade settled in renminbi totalled Rmb2.1tn ($330bn) last year – about 9 per cent of China’s total trade – up from close to zero before 2009.
The bulk of the renminbi trade deals so far has taken place between Chinese companies and their offshore subsidiaries, often for the purposes of financial arbitrage. But an increasing number of multinational corporations have experimented with using the currency, including Jardine Matheson, the Hong Kong-based conglomerate founded in 1832 to sell opium to China in return for tea and other commodities.
The renminbi is now the fastest-growing payments currency in the world, says Lisa O’Connor, director of renminbi internationalisation at Swift, the payments system operated by almost 10,000 banks. “We have more than 1,000 financial institutions in 90 countries transacting in renminbi and they are doing this based on their client or corporate customer demand,” she says. “Customers are demanding this because they have the possibility of saving time and money when doing business in mainland China if they do it in renminbi.”
As well as trade, some international companies have started to fund themselves in renminbi. Two years ago, Beijing introduced reforms that made it possible for groups such as Unilever, the consumer goods conglomerate, to issue renminbi bonds in Hong Kong and then move the proceeds to the Chinese mainland. Issuance of these so-called “dim sum” bonds has surged since then, with a total of Rmb130bn ($20bn) raised in 2011, triple the amount in 2010.
However, the pool of renminbi available from offshore centres such as Hong Kong, London and Singapore is limited. This is because China still maintains strict controls on the flow of the currency between the mainland and the rest of the world. Foreigners can only invest on the mainland if they have been given special quotas or approvals from the Chinese authorities. Locals face similar restrictions.
For the renminbi to become a truly global currency – one that is used widely as a medium of exchange, unit of account, and a store of value – China will need to liberalise its capital account much further.
“It’s very important that China opens its capital account,” says Dariusz Kowalczyk, a strategist at Credit Agricole, the bank. “A lot of the central banks that could consider the renminbi as a reserve currency have said they will not until it’s convertible under the capital account. This is a key condition.”
Officials such as Zhou Xiaochuan, governor of the People’s Bank of China, have said the country will gradually move towards the free exchange of renminbi, although they have been coy about how fast this will happen.
So far, China has been taking small, incremental steps. In March, for example, China gave Japan permission to buy Rmb65bn ($10bn) of Chinese government bonds, a sum that amounts to less than 1 per cent of Japan’s foreign exchange reserves, which are mainly held in dollars.
Jim Walker, managing director of Asianomics, a Hong Kong-based research house, says China has only “put its toe in the water” so far. “With every major economic policy decision, domestic or otherwise, China’s strategy is to go slowly.”
Capital account liberalisation poses a particularly big challenge to the Communist party. This is because the more China opens up, the less control Beijing will have over interest rates and the value of its currency – two key tools it uses to wield power over the economy.
Never before has a country managed to turn its currency into a global force at the same time as imposing extensive capital controls. China has started a grand experiment in which we are all participants.