The rise of the renminbi as a truly global currency

Now that China is overtaking the US to become the world’s biggest economy, the rest of the world is seeking to assess when the renminbi joins the ranks of the world’s reserve currencies.

Last week the World Bank reported that in 2011 the Chinese economy had been around 87 per cent the size of the United States economy. If China’s growth meets International Monetary Fund expectations, it could therefore expect to overtake the US to become the world’s biggest economy later this year.

To an extent, this is an abstract concept: nobody gets a medal for being the world’s largest economy. What is really interesting is the emergence of the renminbi as one of the world’s major currencies, in spite of the controls inherent in China’s centrally-planned economy.

The most recent figures for renminbi trading across Thomson Reuters foreign exchange platforms show that the renminbi trading volumes on both Thomson Reuters venues – Matching and FXall – climbed to record highs during March. It is typically among the top four traded pairs by volume on Matching and entered the top 10 traded pairs on FXall in March.

The critical question is therefore just how and when this powerhouse currency joins the US dollar and the euro to become one of the world’s reserve currencies: what is the roadmap for the renminbi?

A white paper we supported with the trade association ASIFMA and Standard Chartered on the future of the renminbi looks at this very question. 

Its thesis is that the prevalence of China’s currency does not match the country’s global economic influence – but it will soon. For this to happen, the currency needs to pass these five milestones on the roadmap:

•  it becomes a deposit currency internationally;
•  it is used increasingly for trade;
•  it becomes an investment currency;
•  central banks agree bilateral swap agreements with the People’s Bank of China; and finally
•  it is accepted globally as a reserve currency.

Put that way, it might be expected that progress along this road may take some time. Yet Standard Chartered believes that China’s capital account will be open to the rest of the world by 2020, albeit with some Chinese characteristics. And our managing director for Financial & Risk in China, Adrian Gostick, reports that convergence between China’s onshore and offshore currency markets is inevitable, albeit at a gradual pace.

We can only observe that nobody should be surprised by the speed of progress in this remarkable economy.