China’s currency getting nearer the ‘final frontier’

The renminbi’s journey as a trade and investment currency over the past decade has been rapid and remarkable – and with reforms and international usage continuing to grow apace.
Just last December, China began publishing a new index measuring the renminbi’s performance against a basket of trade-weighted currencies, highlighting that it was no longer pegged to the dollar. In August, China announced a change to the USD-RMB fixing rate, introducing more market orientation into the exchange-rate mechanism.
And the renminbi will soon join the International Monetary Fund’s Special Drawing Rights basket of leading reserve currencies.
But in terms of usage in international payments, the renminbi trails not only the dollar and the euro, but also the British pound and the Japanese yen. So clearly, the renminbi’s internationalisation journey still has some way to go.
But there are two powerful engines that will continue to propel the renminbi along its internationalisation path. The first is the Chinese authorities’ commitment to capital-account liberalisation; the second is China’s economic transformation towards sustained growth.
Over the past few years, China has gradually opened up its capital markets to foreign investors. Schemes were launched such as the Shanghai-Hong Kong Stock Connect and the Renminbi Qualified Foreign Institutional Investor programme.
Authorities also further opened up the China Interbank Bond Market to more institutional investors. That could pave the way for sizeable foreign portfolio inflows.
These deregulation measures reaffirm China’s commitment to capital-account liberalisation, and they send a powerful message: China will continue on the path of reform.
The second engine that will propel the renminbi towards the “final frontier” is the Chinese economy itself. China’s gross domestic product is now expanding at a more “normal” pace – 6.9 per cent in 2015 despite a slowdown in export growth – but it is still one of the fastest-growing major economies in the world.
The recently adopted 13th Five-Year Plan aims to keep annual GDP growth above 6.5 per cent from now until 2020. This, combined with government initiatives such as the “Belt and Road” regional infrastructure investment push, as well as Chinese corporations’ increasing efforts to expand their operations and capacity beyond mainland China, will ensure that the renminbi’s role in world trade and investment continue to grow.
For now, the lion’s share of this involves trade between mainland China and Hong Kong. The next step along the renminbi’s internationalisation journey will happen when China’s other major trading partners start to transact their trade with China in renminbi.
Thailand, for example, counts China as its largest trading partner: In 2015, China’s share of Thai exports reached 11.1 per cent, while 20.3 per cent of Thailand's imports came from China. If just a fraction of this trade were settled in renminbi, it would greatly increase yuan usage in Thailand.
Imagine similar situations happening among China’s key trading partners. The size of the offshore renminbi pool could increase significantly. This is crucial, as the growth of the offshore market paves the way towards ever-greater international usage of the renminbi.
The pieces of the puzzle are now rapidly falling into place. There is still some way to go, but the renminbi is already more than halfway along the path towards this ultimate measure of normality. By staying on its path, it will become a truly global currency.

Kelvin Tan is chief executive officer of HSBC Thailand.