Renminbi: Not bloc trading currency anytime soon, says Asia currency panel

Mark Williams, Chief Asia Economist, Capital Economics; Sherry Madera, Special Adviser for Asia, City of London; Michael Lawrence, Chief Executive, Asia House; Robert Minikin, Head of Asia FX Research, Standard Chartered Bank; and Andy Mather, Digital Transformation Director, Telstra.

Mark Williams, Chief Asia Economist, Capital Economics; Sherry Madera, Special Adviser for Asia, City of London; Michael Lawrence, Chief Executive, Asia House; Robert Minikin, Head of Asia FX Research, Standard Chartered Bank; and Andy Mather, Digital Transformation Director, Telstra

Renminbi: Not bloc trading currency anytime soon, says Asia currency panel

19/05/17

By Paul Nicholson

The renminbi (RMB) will not displace local Asian currencies or replace the US dollar as the dominant trading currency in the region in the foreseeable future, according to a panel of Asian currency specialists speaking at Asia House today.

The panel was convened to discuss the rise of Asian currencies in global markets, 20 years on from the Asian currency crisis of 1997, and general view was that although the RMB dominates the debate, given China’s economic might, that Asian local currencies will not give way to a bloc trading currency in the form of the Chinese yuan.

The roundtable, attended by delegates from financial institutions, UK government, Asian embassies, and Asia House corporate members, heard that despite the RMB entering the International Monetary Fund’s Special Drawing Rights basket of currencies in 2016, the redback is unlikely to challenge the dominance of the US dollar, which currently settles 88 per cent of international transactions, compared with around four per cent for the Chinese yuan, according to Bank for International Settlements 2016 figures.

While the RMB is gaining traction throughout Asia as a major trading currency, it is likely to level off at around 10 per cent of global trade settlement, comparable with the Swiss franc or UK pound, according to Mark Williams, Asia Economist at Capital Economics.

International payment systems are hardwired to either the Federal Reserve or the European Central Bank, making the US dollar and euro dominant as the global trade currencies for the foreseeable future, commented Robert Minikin, Head of Asia Research at Standard Chartered Bank.

The decentralisation of payment systems and the rise of FinTech in Asia, with a rising millennial demographic adopting new transactional technology over transitional banking, could still prove a major disrupter in the currency markets, noted Andy Mather, Digital Transformation Director at Telstra.

Even though the RMB is gaining market share in global FX trading, with Asian economies holding increasing RMB reserves, together with increased currency swap facilities with the People’s Bank of China (PBOC), it would still be a mistake to view the RMB as a bloc currency for the region, observed both Minikin and Williams.

Sherry Madera, the City of London’s Asia Adviser, said that the Belt and Road initiative (BRI) was likely to accelerate the internationalisation of the RMB, as the currency moved through three key stages from trade, to investment, to reserve currency status. Minikin observed that the BRI could create an expansion of debt financing in Asian currencies but there would need to be willing investors.

London is the second biggest global centre for offshore RMB trade in Dim Sum bonds, after Hong Kong, said Madera, with further potential for RMB issuance. However Minikin noted that there had been only one major PBOC bond issue in London, and that more activity in RMB offshore was uncertain.

The PBOC is pursuing a slightly conflicting agenda of RMB internationalisation, while at the same time restricting capital outflows, said Williams, while Minikin commented that the drive to open the onshore bond markets through the ‘Bond Connect’ platform indicated that China is opening up its capital markets to foreign inflows.

The panel also considered the impact of US President Trump on Asian markets and the direction of trade after the US withdrawal of the Trans Pacific Partnership and agreed that the protectionist stance of the new US administration was an opportunity for China to take a lead in regional trade.

The roundtable panel concluded that the changing global trade order, the opening up of China’s capital markets, and the Belt and Road Initiative, would all contribute to the further expansion of the RMB as an international currency, but that its impact in Asia and around the world would be limited by internal PBOC policies and global markets.