26 Feb 2015
Rise of the Renminbi
After nearly a year positioned at number seven, the renminbi has overtaken both the Canadian dollar and Australian dollar by value, according to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), through which the financial world conducts its business operations.
Only the Japanese yen, British pound, euro and US dollar now stand ahead of the Chinese currency, which analysts believe will continue its rise this year.
The growth of renminbi-denominated business around the world has been spectacular: just two years ago, in January 2013, the renminbi occupied 13th spot, with a share of 0.63 per cent according to SWIFT. By December 2014, it reached a record-high share of 2.17 per cent in global payments by value, fast approaching the Japanese yen’s share of 2.69 per cent.
Wim Raymaekers, Head of Banking Markets at SWIFT, describes the renminbi’s breaking into the top-five world payment currencies as an important milestone.
“It is a great testimony to the internationalisation of the renminbi and confirms its transition from an ‘emerging’ to a ‘business as usual’ payment currency,” said Mr Raymaekers.
Hong Kong at the Forefront
While Hong Kong remains the premier offshore renminbi centre, capturing a market share exceeding 60 per cent in 2014, the rise of various offshore renminbi clearing centres around the world, including eight new agreements signed with the People’s Bank of China last year, “was an important driver fuelling this growth,” said Mr Raymaekers.
Overall, global renminbi payments increased in value by 20.3 per cent in December 2014, according to SWIFT data, while the growth for payments across all currencies was 14.9 per cent. “The renminbi has been showing a consistent three-digit growth over the past two years, with an increase in value of payments by 321 per cent,” SWIFT said. “Over the last year, renminbi payments grew in value by 102 per cent, compared to an overall yearly growth for all currencies of 4.4 per cent.”
Hong Kong’s unique connection to the mainland has seen the city amass the world's largest renminbi pool outside the mainland, estimated at about Rmb1.1 trillion. Renminbi business in Hong Kong received a major boost in 2010, when foreign companies were permitted to issue renminbi-denominated bonds for the first time.
More recently, the launch in November 2014 of the Shanghai-Hong Kong Stock Connect provided another milestone in the mainland’s financial liberalisation.
Nathan Chow, an economist at DBS Group Holdings in Hong Kong, believes the renminbi has a “high chance” of being chosen as a reserve currency in the next IMF review. It could even surpass the yen in the rankings this year, and break into the top-four payment currencies, he says.
Benefits Flow On
Hong Kong has been “very important” in the rise of the renminbi, and will “definitely” benefit from its continued development, Mr Chow said.
“Given its geographical proximity, Hong Kong is an important entrepot of the mainland; that’s why the city is handling more than half – close to 70 per cent – of renminbi payments right now, and is receiving over 50 per cent of all letters of credit sent by banks in the mainland,” Mr Chow said.
As an international financial centre, Hong Kong has the infrastructure the mainland needs, and the experts to deal with all of the trades, he continued. But renminbi internationalisation, involving significant capital account liberalisation, is “one of the most sensitive parts of the overall development of the modern Chinese economy.”
All kinds of unforeseen consequences may occur along the way, and Hong Kong is ideal to carry out reforms that can minimise the risk. Without Hong Kong, Mr Chow said, “it would be hard for Beijing to choose a city to carry out these big reforms.”
While there will be competition from other offshore renminbi centres in future, Mr Chow is “not worried” about Hong Kong losing its leading position. “Right now is just the beginning of the renminbi internationalisation process. Renminbi liquidity of the offshore market is around two per cent of the onshore liquidity.”
Taking the euro as a reference (the euro being about 30 per cent of the US liquidity onshore), “if history is any guide, there is still ample room for offshore renminbi liquidity to grow,” Mr Chow said.
Still Number One
Arnon Goldstein, BNY Mellon’s Head of Relationship Management and Sales for Treasury Services in Asia-Pacific, agreed that, despite mounting competition, “Hong Kong is still the undisputed number-one offshore renminbi payments centre.”
“The bulk of offshore renminbi activity continues to be in Hong Kong,” he said. “This has to do with a variety of factors, such as geographic and business proximity of trade flows and commerce to China, the development of the “dim sum” bond market, as well as more recently, the development of a stock connect between Hong Kong and Shanghai bourses – the unique positioning of Hong Kong has certainly played a role.
“But on a broader level, China and its economic size and growth are driving factors behind the internationalisation of the renminbi and this will have an impact on other growing centres, including Singapore and London.”
In terms of renminbi growth, other locations to watch are Europe (notably Germany) and Australia, Mr Goldstein said, both largely due to investment, trade and commodity flows. “In addition, we are likely to see more offshore renminbi clearing banks in countries with natural trade or investment flows, and gradually elsewhere in Asia and in developing regions as well.”
Mr Goldstein predicts the renminbi will further secure, consolidate and expand its place among leading currencies. “From a treasury services perspective, we continue to see regional payments and trade growth across Asia including China, some of which is fuelled by improved economic performance in the US. While the growth in renminbi is significant, the main currencies of trade will likely still continue to be dominated by the US dollar and euro this year.”