May 3 – In a special report, John McCormick, the Chairman of the RBS Group, has suggested that the RMB will be a globally traded currency by 2015. Noting that the use of China’s RMB internationally is rapidly increasing despite China’s slowing economy, he states that now is the time for the new leadership to push the RMB as a major international currency.
“Financial crises in the U.S. and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around US$5-6 billion daily – double what they were a year ago,” said McCormick.
McCormick further suggests that the Chinese authorities are also pushing to make the RMB internationalized by 2015.
“The International Monetary Fund is reviewing its special drawing rights basket, which uses four key international currencies to supplement member countries’ official reserves and bolster liquidity. The deadline for completing that review is 2015. Based on where we see the G7 countries today, we believe there’s a very strong chance that China can get the onshore version of RMB, CNY, into that basket – a real boost to the currency on the world stage. Also, the Shanghai Municipal Government has set a goal of making the city the global pricing centre for both onshore and offshore RMB financial products by 2015 and a global financial centre by 2020. These goals clearly set the blueprint for the internationalization of the currency,” he says.
The RBS Group – previously the Royal Bank of Scotland – is a major British financial institution. McCormick notes the strength of the city of London as a global financial trading hub by recognising that China wants increasing access to international markets for its RMB. The British and Chinese Governments are in talks to promote London as a currency centre for the RMB, operating in partnership with Hong Kong. Achieving this would make London the first major RMB hub outside of Asia, and would signify a large step towards the internationalization of the RMB.
“It is likely that, as part of this, the People’s Bank of China (PBOC) will sign a currency swap line with the Bank of England within a year, two at the most, enabling both banks to exchange a fixed amount of each other’s currencies to stabilise their own and improve liquidity. In time, London could even set up its own clearing bank for the RMB. There is RMB trading in Singapore but the Chinese authorities see this more as a regional hub. They want Hong Kong to partner with London so that they have first-mover advantage in Europe,” McCormick suggests.
According to the report, however, meeting the government’s current deadline for RMB internationalization is not going to be a simply process. Currently, the RMB ranks 14th as a global payments currency, with market share a long way behind the U.S. Dollar and the Euro.
Another huge barrier is that the RMB is not yet fully convertible. The report suggests, however, that China is just two steps short of achieving that and three steps away from being an international currency.
The report states that in order to change this, the Chinese authorities need to take the following steps:
- Allow all capital account items to be settled freely in RMB both ways – in and out of China;
- Lift all quotas and streamline the application and approval processes; and
- Increase the use of RMB for international trade and investments.
“Logically, it would be reasonable to expect China to make the RMB fully convertible before embarking on the ultimate goal of internationalizing the currency. But China appears to have put “the horse before the cart” by creating an offshore market to promote the currency’s use in international trade and investments first. And this offshore trade has taken the lead over the onshore market. Again, the authorities clearly have a timeframe in mind. China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound. But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda,” affirms McCormick.
Chris Devonshire-Ellis, Founding Partner of Dezan Shira & Associates, comments: “McCormick’s views are interesting but leave out one important point – China is still bound by internal problems it domestically faces with the pricing of immovable assets. Real estate in China is at totally unreasonable levels – an apartment in Pudong costs RMB13.5 million (USD2.19million) whereas a detached house in Vancouver can be had for 50 percent less. China’s problem is that if it makes the RMB fully convertible there will be a massive price correction concerning property values in China, and many households will automatically dive into negative equity. The outrage amongst Chinese citizens would be politically intolerable for the Government.”
“McCormick is correct in pointing out that China does need to follow the steps he is suggesting, and open the RMB up to the capital markets. However, I am sceptical over the 2015 timescale, and feel at best reforms such as those described are a minimum of seven-eight years away, and then only when China has been able to get its State Owned Enterprises’ lending off the books of the Chinese banks,” Devonshire-Ellis further adds.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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