Going global: A question of how, not when

China’s unique trade links with Asia provide an opportunity to drive forward the internationalization of the renminbi (RMB). 


While China runs significant trade surpluses with countries around the world, it tends to run trade deficits with countries in the region. These deficits would allow the RMB to be traded more widely on a regional basis. 


“It is natural that the renminbi can go to the region – the East Asia region, ASEAN countries and in particular, Hong Kong,” said Professor Fan Gang, director of the National Institute of Economic Research and a former member of the Monetary Policy Committee of the People’s Bank of China.


One important condition to make a currency more international is a net deficit in a country’s international balance of payments either on the current account or the capital account, said Fan. 


Fan, among a group of the city’s leading financial industry players, was speaking at the China Daily Asia Leadership Roundtable on “Hong Kong and the Internationalization of the RMB” on June 2. The roundtable featured a discussion of the progress the RMB has made towards becoming a more global currency.


Speakers agreed that the question is not whether the RMB will become more widely accepted as an international settlement currency but how best to manage the process. 


“China is different. Back 20 years ago when the Shanghai stock exchange was formed, people said ‘what is it’. Well, it was to trade shares. At the time, China was a planned economy. There were no companies in shares,” said Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd. “China sometimes defies logic.”


But opening up a currency to the world stage after decades of fairly rigid regulation presents a number of challenges. 


One is China’s role as a global manufacturing centre. Economic growth has been driven by foreign investment and exports, both of which bring foreign currency to China rather than taking China’s currency abroad. Chinese companies use RMB to buy foreign goods for import but the country still receives dollars for its exports. In other words, the RMB is not fully utilized as the settlement currency on both outgoing and incoming transactions.


Another challenge is the expectation for the appreciation of the RMB, which means that people are using it not for its strength but for speculating. 


A lack of full convertibility and a shortage of liquidity are also problems. Typically, an international currency requires flexibility in its foreign currency regime, convertibility and a liberalized capital account that allows for full liquidity – and faith in its currency. 


Still, the process should be based on China’s own needs, particularly the challenges the country faces managing liquidity, said Zhu Yan Lai, assistant chief executive at Bank of China (Hong Kong) Ltd, the designated clearing bank in Hong Kong for RMB business. 


Only when these conditions are met “can we say that the renminbi is internationalized, or regionalized...,” said Fan. 


There are some risks inherent in the process, said R. Sean Craig, International Monetary Fund (IMF) resident representative in Hong Kong. Several of those risks are centered on Hong Kong’s regulatory structure. 


“I think the process of RMB internationalization is going to go forward,” said Craig. “It will happen. But there are still things that can make it happen smoothly and things that can derail the process or slow the process down.”


There are three key risks for Hong Kong, said Craig. 


The first is speculation. RMB deposits are growing rapidly but the growth is driven by expectations that the currency will appreciate. Eventually, that process will stop or even reverse itself. 


Second, there is a fair amount of obscurity over how risk is priced in bond investment. 


Third, foreign currency credit has grown very rapidly in Hong Kong, casting some doubts about how well those loans are being managed. In the past year, Craig said, foreign currency credits have grown by 60 percent and “when you see credit growing that fast you have to worry about how well it is being managed.”


“We have to be brave,” said Alexa Lam, deputy CEO and executive director for Policy, China and Investment Products at the Securities and Futures Commission.


But “of course we have to be aware of the risks,” she adds.


At the end of the day, said Charles Li, chief executive of the Hong Kong Exchanges and Clearing, policymakers in the Chinese mainland know exactly what the constraints are that would allow the currency to internationalize. 


“In many ways, we don’t need to debate to death the internationalization of the renminbi … why it is going to work or why it is not going to work. It will work in some ways. It will not work in all ways,” said Li.


Even though it is difficult to predict how the RMB will evolve into a global currency, the process is likely to be momentous, said Peter Wong, chief executive of HSBC Asia Pacific. 


“The internationalization of the renminbi will be a major event in the global economy,” Wong said.

China Daily Asia Weekly on June 03, 2011, page 12-13