China's overseas investment paving way for renminbi internationalisation

It is useful to look at the changes China has initiated. The county seeks expansion abroad and a transformation of the economy at home. Both emphasise higher-value production and services as a tool to make domestic consumption a bigger engine of economic growth.
China’s outbound direct investment (ODI) has been increasing at a rapid pace, growing at 19 per cent year on year on average between 2009 and 2014.
Last year, ODI surged to US$116 billion (Bt4.13 trillion), almost equal to the level of foreign direct investment (FDI) at $120 billion. (Footnote 1). China has historically emphasised FDI rather than ODI. Now, however, this policy is undergoing a major shift, with policy-makers aggressively encouraging companies to go abroad.
Big infrastructure investments in Asia and Europe, as envisioned in the “One Belt, One Road” initiative outlined by Beijing in 2013, will be a key feature of this ODI push. (Footnote 2)
China’s ODI is set to grow faster this year and beyond on the back of the continued policy push for Chinese companies to upgrade their production and invest abroad.
We believe the “One Belt, One Road” initiative will be a major catalyst for manufacturing and construction-related services and investment flows.
This initiative provides more opportunities for increased cooperation between China and Thailand in areas such as high-speed rail
 ways, agricultural trade and financial investment. This year marks the 40th anniversary of diplomatic relations between Thailand and China. China is now Thailand’s largest trading partner, and Thailand in turn is China’s fourth-largest trading partner within Asean. (Footnote 3)
Trade is now flourishing between the two countries. Last year, bilateral trade volume rose to $72.6 billion. At the same time, the volume of bilateral investment reached $6 billion. (Footnote 4)
The globalisation of China’s capital investment will also lead to an increased use of the renminbi in the offshore market. Not only are outbound flows growing steadily, but the proportion of cross-border flows being settled in renminbi has also increased rapidly in just the past few years. (Footnote 5)
The volume of Chinese ODI settled in renminbi increased 117.9 per cent in 2014 to a total of 186.56 billion yuan (Bt6.64 trillion), and accounted for 26 per cent of total ODI for the year. (Footnote 6)
This trend is set to grow further as China’s overseas investments increase.
The renminbi is also already firmly established as a trade currency. As of the end of last year, annual trade settlement in the unit reached 6.55 trillion yuan, equivalent to 22 per cent of China’s overall trade – up from 12 per cent at the end of 2012.
At the current pace of growth, more than 50 per cent of China’s global trade in goods and services is likely to be settled in renminbi by 2020. (Footnote 7)
The next step for renminbi trade settlement is whether it can hit critical mass and become a major trade settlement currency for a large number of China’s major trade partners. (Footnote 8)
In other words, as China deepens its trade relations with Southeast Asia, the renminbi’s use in trade settlement is set to increase. Given the extent of the trade and investment flows between China and Thailand, Thailand is well positioned to capture opportunities from this.
The pace and progress of renminbi internationalisation is driven by China’s domestic reform, a process that will be undertaken steadily and with considerable care. While Beijing is likely to retain some controls, such as quotas to limit undesirable swings in capital flows for some time, the authorities will eventually drive capital-account opening and currency convertibility, which could, in turn, lead to more outbound direct investment.
We forecast that the renminbi will achieve fully convertibility by 2017. (Footnote 9)
Chinese outbound direct investment, the internationalisation of the renminbi and the financial reforms within the country all have one common theme: China’s integration into the global economy – which will allow other countries, including Thailand, to capture the benefits of China’s growth more directly.
Footnotes:
1 HSBC Global Research – China Inside Out – Time to go shopping
2 HSBC Global Research – China Inside Out – Time to go shopping
3 Error! Hyperlink reference not valid.
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5 HSBC Global Research – The rise of the redback IV
6 PBoC RMB report
7 HSBC Global Research – The rise of the redback IV
8 HSBC Global Research – The rise of the redback IV
9 HSBC Global Research – The rise of the redback IV

Helen Wong is chief executive, Greater China, HSBC