The rise of the renminbi may be unstoppable, but some believe China’s vision of a global currency to rival the dollar seems destined for a long haul. Are we likely to see the ‘redback’ challenge the ‘greenback’ any time soon, and meantime, what is its appeal as an investment in international trade?
Since 1998 the People’s Bank of China has pursued a gradual liberalisation of the renminbi (RMB), or yuan. Last summer it took perhaps its boldest step yet in its campaign: extending the currency’s trade settlement programme, previously limited to countries in south-east Asia, to run worldwide.
Shortly afterwards HSBC carried out its first UK cross-border transaction involving RMB under the settlement. Analysts, including HSBC’s Hong Kong Chief Executive Officer, Mark McCombe, anticipating rising demand for offshore RMB trade finance and other RMB products, said at the time: “This is an important step towards the RMB becoming an international currency in global trade”.
While few doubt that the RMB’s international business growth and importance will continue to grow, opinion divides sharply on the timetable.
“The dollar’s reign is coming to an end,” a Wall Street Journal commentator declared confidently in March 2011. He pointed to a quadrupling of the share of yuan-denominated bank deposits in Hong Kong, and the dozens of foreign companies issuing ‘dim sum’ bonds in Hong Kong. Within the decade, he predicted, the yuan would be challenging the dollar and euro for dominance.
By contrast, Michael Pettis, writing for Roubini Global Economics, cites slow banking reform and poor geopolitical conditions in support of his contention that “the RMB is unlikely to become a serious reserve currency in the foreseeable future”.
Meanwhile, however, there has been no shortage of takers for the proliferation of RMB investment products. In HSBC, Singapore’s RMB savings suite, which was launched in January 2011, attracted over 1 billion RMB in the first month.
Opportunities are now expanding further with the introduction of the Qualified Foreign Limited Partner scheme in Shanghai, which, since coming into effect in February 2011, gives foreign managers and investors the chance to access China’s private equity industry. This move is a very significant opening for overseas companies – and one that Beijing’s municipal government is also apparently looking to adopt.