China's renminbi goes global

The renminbi faces both cyclical and structural forces. On a cyclical front, policy-makers are easing monetary policy to support growth, but on a structural front, they are promoting reforms aimed at improving the quality of growth and internationalising the currency.
The calming of the dollar’s bull-run is making both cyclical easing and structural reform more palatable in the near term. But it is in China’s interest to front-load such measures because of the rapid deceleration in growth and inflation and because the IMF’s review of the SDR basket is scheduled for late 2015.
China’s leaders have repeatedly committed to keeping the external value of the renminbi broadly stable, despite domestic economic challenges. However, for the currency to be included in the select SDR basket of international reserve assets, the renminbi needs to become more freely usable – which means a more open capital-account structure and the currency’s increased use for international trade and investment purposes.
If short-term currency devaluation is ruled out, policy-makers and the private sector have more incentive to pursue economic and financial reforms to resolve the structural problems of low growth and high debt. But a stable renminbi over the medium term is also seen as a prerequisite for a reserve asset.
Gaining SDR status could over time lead to greater use of the renminbi among official reserves managers and eventually even see China become a global lender of last resort. Furthermore, such a national goal could spur greater domestic reforms, as happened with China joining the World Trade Organisation in 2001, when manufacturing and trade opened up and boosted growth.
China is making good progress on these reforms. The past year has seen the initiation of the Shanghai-Hong Kong Stock Connect and rapid expansion of portfolio investment flow schemes.
This year could see the launch of the Shenzhen-Hong Kong Stock Connect, schemes to open the onshore bond market, foreign banks being given more onshore market access, and greater deregulation for currency transactions in the new free-trade zones in Guangdong, Fujian and Tianjin.
By opening up the capital account and allowing private-capital flows to offset current-account inflows, the central bank can become more hands-off in the currency market over time. When the renminbi becomes more market-oriented and recognised as a reserve asset, the bank will no longer require such a large chest of reserves.
The existing stock of reserves is being deployed into more productive uses such as funding infrastructure projects via the New Development Bank, the Asian Infrastructure Investment Bank and the “One Belt, One Road” fund. The reserves could also be used as capital injections for local banks to support domestic lending and debt structuring.
The central bank has re-established market confidence in the renminbi via its currency policy and comments. Now, Beijing can also manage the exchange rate by adjusting the pace and order of its capital-account liberalisation.

Paul Mackel is Head of Asian FX Research, HSBC