Global usage of the RMB remained low in 2017. Will 2018 be a make or break year for the Chinese currency?

China’s project to internationalise its currency has stalled. Highlighting this is the latest data from SWIFT’s RMB tracker, which shows that the currency accounts for just a 1.61% share of global cross-border and domestic payment activity.

This is down from the 2.31% share the currency accounted for in 2015 and comes despite the growing global importance of the Chinese economy and several landmark developments, including the inclusion of the currency in the IMF’s Special Drawing Rights basket.

Bumps in the road

The data might come as a disappointment to Chinese lawmakers who have been keen to promote global usage of the currency, elevating its status to match that of the Chinese economy. It is unlikely to be a surprise, however. After all, the significant volatility experienced in late 2015 and 2016 has forced Chinese regulators to tighten controls to stabilise the currency over recent years.

Various measures contradicting China’s border ambitions to promote global usage of the currency have been used to do this. These include partially blocking RMB payments offshore, a measure that detrimentally impacted any company that had switched its invoicing currency to RMB, whilst ‘window guidance’ was also employed to temporarily halt the usage of corporate cross-border RMB cash pools.

Although many of these measures have since been lifted, the psychological impact these have had on businesses considering using the RMB remain. Most importantly it has fostered a lot of uncertainty in the minds of treasurers, which may have played a role in the stagnant growth of RMB usage amongst corporates.

While painful for treasurers, and damaging for RMB internationalisation in the short term, these measures have been necessary. “The steps that China has taken in recent years is simply prudent financial management,” says Vina Cheung, Global Head of RMB Internationalisation at HSBC.

“Overall, China has proved in the past that it is committed to reforms and we believe that this commitment remains strong today. RMB internationalisation is part of a long-term structural trend that will continue to change the global economic and financial landscape.”

Greater efficiency

Away from these short-term measures, there are several longer-term structural issues that have hampered greater global RMB usage. One major factor limiting usage is the complexity associated with using the currency for payments, in comparison to the USD, for instance. The regulators are taking steps to remove these issues, however. Most notably, China’s Cross-Border Interbank Payment System (CIPS), which launched in 2015, is to be upgraded and further promoted this year. The system, which uses ISO 20022 messaging standards should bring China’s payment system, and the experience corporates using the RMB for payments, more in line with global standards.

The findings of HSBC’s latest RMB survey also highlight that complex documentary requirements were one of the top three challenges stopping corporates from using the currency. However, this challenge cannot be generalised because for China, different payment purposes require different documents and companies in China responsible for undertaking are accustomed to this requirement.

RMB along the Belt and Road

Further boosting the internationalisation of the RMB is China’s ambitious Belt and Road initiative. “Promoting the international use of the Chinese currency is one of the stated objectives of Belt and Road,” says Cheung. “As a result, we expect Belt and Road trade and investment flows to be increasingly made using the currency and to see a sizeable RMB offshore-debt market emerge to fund the infrastructure development.”

If China has its way, the RMB may also be increasingly used in commodity trading. According to a report from CNBC, China plans to price oil in RMB using a gold-backed futures contract in Shanghai.

Russia, which is keen to limit its dependency on the USD is reportedly interested in using the RMB. The big win, however, will be if China can convince Saudi Arabia to shift from the ‘petrodollar’ to the ‘petroyuan’. Admittedly, there is a long way to go before this can be even close to a reality, but it underscores China’s ambitions.

Reconsidering RMB

With measures in place to make it easier for corporates to use the RMB and international initiatives under way to promote usage of the currency, might 2018 be the year that RMB begins to pick up the pace? HSBC’s Cheung certainly believes so. “RMB internationalisation and global usage will regain momentum in 2018 as the RMB exchange rate stabilises and two-way fluctuation becomes the norm,” she says.

With momentum building behind the RMB once again, Cheung believes there now is the time for treasurers to begin revisiting the benefits that using the RMB might bring to their businesses. “The inclusion of RMB into a currency portfolio cannot only help diversify risk, it can also provide an additional currency option for operational, commercial and investment purposes,” she says.

Cheung suggests that corporates begin to think about re-denominating some trade into RMB as a first step, maybe beginning with intra-group trade. “This will give treasurers practical experience using the currency and allow systems and processes to be configured correctly,” she says. “This is vital if treasurers are to use the currency effectively.”

The year of the RMB?

China clearly has a long way to go before the international usage of its currency matches its position in the global economic order. And whether the RMB will ever challenge the USD to be the world’s top reserve currency remains to be seen.

Indeed, even growth in the short-term remains uncertain. A lot will depend on the policy steps the Chinese regulators take and whether trust in the long-term direction of the currency can be rebuilt.