24 October 2016
People's Bank of China governor Zhou Xiaochuan (right) expects the renminbi to be included in the SDR basket, a move endorsed by IMF head Christine Lagarde. Photo: Xinhua
People's Bank of China governor Zhou Xiaochuan (right) expects the renminbi to be included in the SDR basket, a move endorsed by IMF head Christine Lagarde. Photo: Xinhua

SDR call will reflect future hopes as well as current use of RMB

The renminbi’s use in international transactions remains heavily tilted toward trade, with limited adoption as an investment currency.

On some metrics, progress on internationalization appears to have slowed.

The US dollar remains the dominant presence in global trade and finance.

As the world’s largest exporter, China has a natural advantage when it comes to raising the importance of the renminbi in trade settlement.

The data shows 2.1 trillion yuan (US$329 billion) worth of China’s imports and exports were settled in renminbi in the third quarter, up 35 percent from a year earlier.

That’s equal to about a third of China’s total trade for the period.

China’s share of total payments processed on the SWIFT network continues to edge up.

In September, the renminbi accounted for 2.5 percent of total payments, up from 1.7 percent a year earlier.

That makes the renminbi the fifth-most used global currency, jostling for fourth place with the Japanese yen.

Overtaking the British pound, which is in third place and accounts for 9 percent of payments, will be a longer-term project.

Progress on expanding the use of the renminbi as an international investment currency has been more halting.

Cross-border portfolio flows in and out of mainland China through programs like Shanghai-Hong Kong Connect and the qualified foreign institutional investor scheme remain limited.

Extreme volatility on the mainland equity markets and concerns about unpredictable regulators has raised a red flag for international investors.

Renminbi deposits held in Hong Kong, Taiwan and South Korea have leveled off and, in some cases, have started to edge down.

That might reflect easier access to mainland China’s domestic capital markets, reducing the need to hold renminbi offshore.

It could also reflect a diminished interest in holding renminbi as expectations of depreciation grow.

The consensus forecast is for the renminbi to weaken to 6.6 per US dollar at end-2016 from 6.39.

The International Monetary Fund estimates that 1.1 percent of global foreign exchange reserves were held in renminbi at the end of last year.

That’s up from 0.7 percent at the end of 2013, but still insignificant relative to the US dollar, which accounts for 63.7 percent of total global reserves.

It’s also behind the share of reserves held in the Australian and Canadian dollars.

Just 0.6 percent of international debt securities outstanding are denominated in renminbi, compared with 43.1 percent for the US dollar.

Swap agreements totaling 3.3 trillion yuan have been signed by the People’s Bank of China and other central banks.

Currency swaps can be used by trade partners to cushion against a balance of payments crisis. As such, they reduce the need for US dollar reserves and pave the way for expanded use of the renminbi as a reserve currency.

Foreign central banks have been given enhanced access to China’s domestic capital markets.

The Bank for International Settlements data on foreign exchange market turnover provides a comprehensive read on the renminbi’s global position.

Unfortunately, the BIS review is carried out only once every three years.

The latest data, from 2013, shows the renminbi in ninth place, with 2.2 percent of global turnover.

Based on the SWIFT payments data, its ranking has likely improved a little since then.

Bid-ask spreads in currency markets provide a more high-frequency reading on the renminbi’s relative position.

A tight bid-ask spread suggests strong liquidity and trading activity.

On that basis, the renminbi’s position remains some way off that of the euro, yen and British pound.

Bid-ask spreads so far in the second half of this year have averaged 0.015 percent in the onshore renminbi market and 0.067 percent in the offshore market.

That compares with 0.01 percent for the euro, yen and British pound.

Taken together, the evidence confirms significant use of the renminbi in trade settlement and a considerable distance left to travel before it becomes a major investment and reserve currency.

In that respect, the IMF’s forthcoming decision to include the renminbi in its special drawing rights basket is as much a bet on future adoption as it is recognition of current use.

The views expressed in this article are those of Tom Orlik and Fielding Chen, economists at Bloomberg Intelligence.

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