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Celebrating the yuan’s internationalization
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IN the past 30 years, China’s rapid economic growth has been extraordinary historically. In the coming years, that expansion will translate to international might in foreign-exchange markets.
On October 1, 2016, China celebrates its National Day. It is also the day when the Chinese renminbi, or yuan, will officially join the International Monetary Fund’s (IMF) international reserve assets.
Today, the international reserve assets are still dominated by the weights of the US dollar (42 percent), the euro (31 percent) followed by the Japanese yen (9 percent) and the British pound (8 percent). After October 1, Chinese renminbi (11 percent) will have a third-largest position. In the coming decades, its role is likely to grow far faster than those of its peers — not just in the IMF reserve basket but in the allocations of central banks, as well as those of public, private, sovereign and individual investors.
Nothing reflects the behind-the-façade positioning for the renminbi as the dramatic expansion of offshore renminbi clearing hubs — that is, international financial hubs that can build liquidity and promote the use of the Chinese currency outside of China.
Shifting overseas
Today, there are more than 20 offshore renminbi clearing hubs appointed by the People’s Bank of China. These hubs are characterized by strong trading and investment ties with China. They are also strategically located in the key world regions covering all time zones.
In the early days of the renminbi internationalization, Hong Kong had a near-monopoly of all renminbi payments internationally. For all practical purposes, this dominant position endured as long as the mainland was mainly a destination of foreign capital.
Today, as Chinese multinational companies and investors are internationalizing rapidly and Chinese capital is moving across the borders, Hong Kong’s role as the leading renminbi offshore center remains dominant in absolute terms but is declining in relative terms. It still has more than two thirds of offshore RMB traffic (70 percent).
Until recently, Singapore was the strong second renminbi offshore center in the world, but not anymore. After a year of the “Osborne Doctrine” — London’s purposeful efforts to have a closer relationship with China — the UK (6.5 percent) replaced Singapore (4.5 percent) as the second largest renminbi offshore center worldwide.
While Singapore fell third among the renminbi offshore centers, the city-state remains a key hub, thanks to its location as a geographic hub for foreign multinationals and their treasury centers, as well as regional commodity trade. As a third-largest foreign exchange trading center behind the UK and the US, it will continue to play a central role in providing offshore renminbi liquidity to the region.
US as rising offshore center
Until recently, the US had no role among the renminbi offshore centers but unofficially that is changing as well.
About a year ago, the US-China Summit in Washington decided to “look forward to continuing to discuss mechanisms to facilitate renminbi trading and clearing in the United States,” as the White House release put it. What that short mention really meant was that, while Washington would insist on its containment strategy against China in geopolitics, it opened the door to Wall Street for a rapid catch-up as a de facto — but not a de jure — renminbi offshore center.
As a result, the US (3.1 percent) today ranks fourth after Singapore. Nevertheless, the position remains far too low for the world’s financial leader.
As the Chinese currency will begin an accelerated financial expansion that will reflect the mainland’s economic role in the world economy, both New York’s Wall Street and London’s City have few alternatives but to embrace the renminbi.
Dr Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/
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