RMB on a reserve currency roll
Updated: 2013-04-17 05:51
By Anita Fung(HK Edition)
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While economists have been debating how long it will take the renminbi to achieve reserve currency status, the "redback" seems to have acquired a lot of reserve-like attributes already.
Most analysts tend to view China's renminbi-as-reserve currency project through the prism of a half-empty glass: China needs to loosen capital controls further, they say, or increase offshore liquidity, or liberalize interest rates.
While there is truth in all these critiques, they tend to obscure just how far and fast the renminbi has come despite these drawbacks and how far it has moved in its journey towards reserve status, particularly among the mainland's big trading partners.
We believe that in the near- to medium-term, the renminbi's status as an international reserve currency will be determined as much by a quasi-political risk assessment by regional central banks as to whether the Chinese government will keep its economic liberalization agenda on course as by the presence or otherwise of capital controls or the depth of offshore liquidity.
Even Beijing's harshest economic critics have never accused it of inconsistency. China's steady progress towards full convertibility via capital-account liberalization has survived political change at home and rolling crises abroad and is unlikely to change direction now.
We believe the world is moving towards a more balanced future of multi-polar reserve currencies: the renminbi will not replace the US dollar, but stand alongside it as both an alternative and a counter-weight in the global financial system.
China has made considerable progress on the first two stages of its plan for full integration of the renminbi: promoting it first as a trade currency and then as a medium of investment.
From its official start in 2009, over 10 percent of China's cross-border trade - some 2.9 trillion yuan ($469 billion) - is now settled in renminbi. We expect that to triple in percentage terms over the next two years, and the redback to achieve fully functional convertibility in five years.
The growth in the renminbi-denominated offshore bond market and renminbi trade settlement has also been little short of spectacular. The Chinese government and corporations - both mainland and international - issued some 270 billion yuan in "dim sum" bonds last year, up 46 percent year-on-year.
By the end of 2012, renminbi deposits in Hong Kong topped 600 billion yuan, and trade settlement flows through Hong Kong banks grew 37 percent to 2.6 trillion yuan, according to HSBC data. Including certificates of deposit, renminbi liquidity in the city rose to a record high of over 730 billion yuan.
But even these oft-cited data fail to tell the whole story about the renminbi's increasing role in the international monetary system.
Recent research by Arvind Subramanian and Martin Kessler of the Peterson Institute of International Economics showed that seven out of 10 emerging East Asian currencies now track movements in the renminbi more closely than they do the US dollar. Only Hong Kong, Vietnam and Mongolia continue to track the dollar more closely, and Hong Kong is pegged to the greenback.
This has important implications. The economic destiny of emerging Asian economies is becoming increasingly interwoven with China.
The impact of even a small change in Asian reserve policy could be profound. Central banks in emerging Asia (excluding China itself) hold more than $2 trillion in foreign reserves, almost 20 percent of the global total, according to HSBC and Bloomberg data, and given their increasing integration with China, it makes economic sense to hedge some of their exposure by holding renminbi.
And even if, as many analysts believe, the days of one-way renminbi appreciation are gone, the currency's resilience in the face of the exogenous shocks of the past five years would make it an attractive proposition.
As the arguments in favor of the renminbi build, the outlook for the US dollar is becoming more uncertain. US dollar yields are at historically low levels; there are growing worries about the long-term impact of Washington's accommodative monetary policy; and persistently weak US demand for Asian imports is undermining the argument that export industries will prolong the US dollar's life as the world's sole reserve currency.
China has already signed swap agreements worth almost 1.3 trillion yuan with 21 central banks - five of them in East Asia - and if recent media reports are to be believed, the Bank of England is interested in becoming No 22. Despite the continuing legacy capital restrictions, the renminbi pool is still getting wider and deeper with every month that passes.
All these steps have gone a long way to normalizing the currency's status in international markets and boosting confidence in China's ability and willingness to stick to its plan and to provide the sort of facilities that central banks are looking for when deciding on their reserve portfolio.
Beijing is unlikely to do away with all the restrictions on the capital account for the foreseeable future, if only to protect its still adolescent markets from destabilizing global speculative flows.
But even if they keep some regulations, they will not be alone. IMF data show that more than two-thirds of its member countries still impose some restrictions on direct investment, real estate transactions and capital market transitions.
The renminbi is likely to achieve the status of de facto reserve currency long before it fulfills the complete set of exacting criteria set out by the theoreticians.
The author is CEO, Hong Kong, HSBC.
(HK Edition 04/17/2013 page7)