China is determined to internationalise the renminbi – a course of action which could challenge the US dollar’s long-held dominance as the world’s reserve currency. What progress has China made? Will it achieve its ambitions? And what do treasurers need to know about using the currency? Treasury Today Asia investigates.

The geopolitical landscape is changing. China, the once reluctant global superpower, is awakening. The country’s leader, Xi Jinping, has said that China is ready to “take centre stage in the world” – and driving this transformation is China’s economic power. Indeed, Xi asserted in a speech late last year that it was time for China to promote its economic model, defined as socialism with Chinese characteristics, around the world.

China’s emergence as a leader on the international stage comes at a time when the world is looking for leadership as the United States looks inwards and Europe deals with its own turmoil. And as the epitome of the potential of the developing world, China is well placed to establish a new world order. Xi has expressed this, saying that China can provide a “new choice” for the developing world.

By promoting its economic model to the world, China is also promoting its currency. And from a symbolic point of view, displacing the US dollar as the world’s most dominant reserve currency will be a strong indication that China has taken centre stage.

Long-term project

The desire to push China outward and internationalise the renminbi is not new. In fact, Chinese leadership has been taking steps to achieve this for just under a decade, as the country’s economy expanded and became more integrated with the rest of the world.

Many date this project back to 2009 when the HKMA and PBOC struck an agreement to settle trade in renminbi between Hong Kong and five cities in the mainland. In 2010, this agreement evolved and cross-border settlement extended to cover 20 provinces and cities. That year also saw the first renminbi-denominated corporate bond issued in Hong Kong by Hopewell Highway Infrastructure.

Since then, China has taken many other steps to internationalise the currency. These include:

• Letting foreign companies use currency to settle foreign direct investments (FDI) in China.
• Directly trading the currency with other countries.
• Creating offshore RMB hubs in cities around the world.
• Allowing freer convertibility of the currency in several Free Trade Zones.
• Launching the China International Payment System (CIPS).
• Permitting certain foreign banks to trade in the mainland bond market.

These actions have proved successful in promoting the use of the currency around the world. SWIFT data showed the renminbi became the world’s fifth global payment currency in 2015. China’s efforts also saw the IMF include the renminbi in the basket of currencies that make up the Special Drawing Right (SDR) in 2016. This was the first time a currency had been added to the basket for a decade and marked a significant step for the internationalisation of the renminbi, making it a reserve currency alongside the US dollar, euro, yen and British pound.

Commenting on the decision, Christine Lagarde, Managing Director of the IMF, said: “The Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

Symbolic gesture

Despite the excitement around the inclusion of renminbi in the SDR, it was arguably a symbolic development. Professor Kathy Walsh, an expert in renminbi internationalisation from the University of Technology Sydney says: “SDR inclusion for China was about status. Many central banks already held the currency in reserve. Australia, for example, had 5% of its reserves in renminbi. So, from a practical perspective, the inclusion made little difference.”

Being a leading reserve currency provides certain benefits. Most notably the concept of ‘exorbitant privilege

Kathy Walsh, expert in renminbi internationalisation, University of Technology Sydney

In fact, Walsh believes that status and prestige are key drivers behind China’s desire to internationalise its currency and eventually challenge the US dollar’s dominance. “Being a leading reserve currency provides certain benefits,” says Walsh. “Most notably the concept of ‘exorbitant privilege’. In times of financial turmoil, there is always a flight back to the US dollar, even when the US caused the turmoil. China believes that it should have a similar status as the world’s largest trading nation – and soon to be its biggest economy.”

Currency impasse

Talk of renminbi internationalisation suddenly subsided not long after SDR inclusion. Walsh says multiple factors led to this but highlights the competing economic and political objectives of Chinese policymakers as being the key reason. “I talked to several people at the time and not everyone agreed that internationalising the currency should be a priority,” she says. “Some feared China was at risk of losing control of its economy and the stock market crash and economic headwinds it faced emphasised this fear.”

With the Chinese regulators unsure whether to internationalise the currency further, some corporations lost interest in adopting it. “Our research at the time found that many international companies were open to using the currency,” says Walsh. “This was because the cost of hedging renminbi offshore was less than the cost of hedging USD onshore. But there needed to be more incentive than this, and it didn’t come. Because of this, the US dollar continues to dominate.”

Difficult times

Had China missed its moment to internationalise its currency? It seemed that way in 2017 when the project was dealt a further blow after China reintroduced controls over its financial system, including regulatory measures to stem the money moving overseas. These moves had a negative impact on global renminbi usage. SWIFT data from December 2017 showed the currency only accounted for a 1.61% share of global cross-border and domestic payment activity that year. This is down from the 2.31% share the currency accounted for in 2015.

The controls mentioned above also knocked the confidence of the corporate community, which began to doubt whether China was serious about internationalising its economy and currency. They also required corporates to undo lots of hard work, as the treasury team at Solvay explained to Treasury Today Asia earlier this year. The treasury had been taking advantage of regulatory relaxation and the promotion of the currency, putting in place cross-border cash pools and conducting cross-border settlement in renminbi for some years. Then, almost overnight, the company had to readjust its processes and revert to using US dollar, as China introduced stringent capital controls. This showed that renminbi internationalisation isn’t a one-way street.

Turning the page

After a tumultuous few years, there are signs that the project to internationalise the currency is back on track. SWIFT data from May 2018 shows the renminbi has regained its position as the fifth most active currency for global payments with a share of 1.88%. Meanwhile, data from the Chinese Securities Regulatory Commission indicates that the renminbi is currently the third most used currency for trade finance.

Corporate interest in using the currency is also increasing. Both Citi and Standard Chartered say they are speaking more to clients about renminbi strategies. “Conditions in recent years haven’t been conducive to renminbi internationalisation,” says Sandip Patil, Managing Director and Region Head, Global Liquidity and Investments, Asia Pacific, Treasury & Trade Solutions at Citi. “However, the environment has changed since the turn of the year and there is much more interest from corporates around the currency and how it might suit their treasury operations.”

There are multiple forces driving this in Patil’s opinion, including developments around CIPS, the opening of the capital markets and the continued progress of the Belt and Road Initiative (BRI) – all of which show that China is serious about internationalising. But the most important driver is the shifting geopolitical landscape. “There is clear tension between the US and China, which is creating instability in the markets,” says Patil. “Corporates are exploring how to navigate through this instability, and many, especially those with a material interest in China, are looking to diversify and use the renminbi for some trade transactions with China.”

Flows between China and the rest of Asia are largely denominated in US dollar. But as the renminbi has internationalised, more Asian companies are adopting it for their dealings with China.

Sandip Patil, Managing Director and Region Head, Global Liquidity and Investments, Asia Pacific, Treasury & Trade Solutions, Citi

Frankie Au, Head of RMB Products, Transaction Banking at Standard Chartered, supports this view. He says the headwinds preventing corporates from adopting the renminbi have disappeared, especially regarding the two-way flow of the currency. “China has also relaxed hedging rules, allowing corporates to hedge renminbi exposures offshore, which provides much more flexibility for corporates operating a renminbi portfolio,” he adds.

Because of these measures, Au says that there is growing curiosity from corporates about how to use the currency and what benefits it can offer. “Some companies are being forced to consider the currency because they are receiving requests from their counterparties to be paid in renminbi,” he comments. “However, many more are thinking strategically and looking at how the currency can enable them to achieve better pricing, win more business and reduce the cost of doing business with Chinese counterparties.”

Citi’s Patil agrees, noting that interest in the currency is especially high amongst Asian companies. “Flows between China and the rest of Asia are largely denominated in US dollar,” he says. “But as the renminbi has internationalised, more Asian companies are adopting it for their dealings with China. By doing so they are achieving greater efficiency and pricing advantages over using the US dollar. As a result, I expect to see a lot more intra-Asia trade settled in renminbi over the coming years.”

Strategic adoption

For all the pricing and efficiency benefits companies can achieve using renminbi for trade with China, Patil warns that adoption cannot happen overnight. Both Au and Patil recommend that corporations carefully consider their renminbi strategy to ensure it is executed effectively.

Indeed, there are multiple commercial and operational factors to consider. For instance, on a commercial level, it is likely companies will need to adjust their organisational and procurement policies to accommodate the new currency. Corporates should also renegotiate payment terms with suppliers to reflect the change.

From a treasury perspective, Citi’s Patil explains that treasurers must ensure the company has settlement accounts and intercompany agreements in place to support the currency. He adds that treasury teams will also need to investigate their cash management infrastructures. Doing so will ensure they optimise how they use the currency.

Treasury must also play a key role in working through and solving the unique issues encountered when using the renminbi, as highlighted by HSBC’s 2017 Renminbi Internationalisation Survey. Corporates noted a number of issues that can arise when using renminbi for cross-border business, including a lack of solutions for surplus cash onshore, unclear and shifting regulations and onerous documentary requirements.

To work through these considerations and challenges, many corporates are focusing on small-scale experiments with the currency. Citi’s Patil says most of the bank’s clients are adopting renminbi in a handful of legal entities. “This sandbox-style approach gives the business the opportunity to work through all the nuances associated with using the currency without the risk of full-scale adoption,” he explains. “Most importantly, it gets people comfortable with the currency, which is crucial for long-term usage to occur.”

Renminbi’s Belt and Road boost

A crucial driver for greater renminbi internationalisation will be China’s ambitious BRI. The project, which will boost the flows of trade, capital and services between China and the rest of the world, will not only increase trade with Belt and Road countries but also promote the use of renminbi as a trade currency.

“Promoting the international use of the Chinese currency is one of the stated objectives of Belt and Road,” says Vina Cheung, Global Head of RMB Internationalisation at HSBC. “Because of this, we expect the currency to be used increasingly for trade and investment flows along the Belt and Road. We also expect to see a sizeable renminbi offshore-debt market emerge to fund the infrastructure development.”

Standard Chartered’s Au adds that it makes sense for the renminbi to be used for subsequent transactions if these infrastructure projects are funded in the currency. “This will avoid a currency mismatch, removing the currency risk and reducing the cost of the project overall,” he says.

The corporate world agrees. HSBC’s renminbi survey shows over 70% believe that BRI will have either a significantly positive or a positive impact on renminbi usage in the future. In another survey conducted by China Construction Bank, 72% of all respondents said the Belt and Road initiative is having the biggest impact on RMB internationalisation.

To support this, the Chinese government is determined to improve the currency’s infrastructure, as Yin Yong, Deputy Governor at the People’s Bank of China (PBOC), explained in a speech last year: “The PBOC will continue to improve the renminbi cross-border payment framework and make the renminbi play an important role in pricing, settlement, investment, financing and trade. The currency’s internationalisation will be a medium- to long-term process backed by China’s strong economy.”

For more on China’s BRI and what it means for your business, read our deep dive into the topic in the July/August edition of Treasury Today Asia.

Will China become the world’s leading currency?

Overall, the signs for the renminbi are positive. HSBC’s 2017 Renminbi Internationalisation Survey shows that more businesses not currently using renminbi for cross-border transactions are planning to do so in the future. This then begs the question: will China achieve its ambitions and become a truly international currency? And will this be at the expense of the US dollar?

“The renminbi will become a global currency,” predicts Walsh. “It won’t displace the dollar, however. In fact, I believe there is room for two strong reserve currencies. The big question is how long this will take. I used to think it will happen in ten years but now I think it will be closer to 20.”

Standard Chartered’s Au shares a similar view. “The renminbi is on the rise,” he says. “It will take time for it to reach its potential but it is heading in the right direction and I believe will sit alongside the US dollar as one of the world’s major reserve currencies.”

Citi’s Patil expects that geopolitics will play a big role in the renminbi’s future. “China will become an increasingly dominant player on the global stage, especially as the US takes a more protectionist stance and the renminbi will follow,” he says. Patil does, however, note that this will depend on continuing deregulation and increasing liquidity in the offshore renminbi market.

HSBC’s Cheung believes renminbi internationalisation is inevitable. “Renminbi usage shall reach the stage of balancing China’s influence as a leading trading nation and the growth engine for the world,” she says.

It may be easy to dismiss the renminbi’s potential to challenge and displace the dollar. But it has only been 100 years since the US dollar displaced the British pound – so who’s to say another change isn’t on the horizon?