Last week I attended the Asian Securities Industry & Financial Markets Association (ASIFMA) annual conference on offshore renminbi markets. Anyone who is put off by the dry title hasn’t been paying attention to just how exciting the renminbi has become: in January it was ranked by SWIFT, a financial messaging network, fifth globally in terms of the aggregate value of payments made, behind only the “big four” of US dollar, euro, sterling and yen. It has since dropped back a bit—owing to seasonal factors, principally—but the trend is inexorable. The renminbi is becoming a global currency.
On the one hand this shouldn’t be a surprise, given that (in purchasing-power-parity terms at least) China is the world’s biggest economy. On the other, it is surprising given that China still employs strict controls on the flow of money across its borders. China’s authorities have been relaxing these, in careful stages, for several years, in the knowledge that the future health of its own financial system relies on exposure to international capital markets.
The transition is a delicate one: China wants to keep control of the exchange rate (which it allows to move around a fixing point in a 2% band, restricting volatility), domestic interest rates and the money supply. But it also wants to encourage the use of the currency abroad, ultimately to gain some of the “seigniorage” benefits that come with issuing a global reserve currency (something Valéry Giscard d'Estaing, a former French finance minister, referring to the postwar dollar standard, called an “exorbitant privilege”). The IMF, whose representative in Hong Kong Shaun Roache addressed ASIFMA’s audience last week, is considering whether to include the renminbi in the basket of reference currencies for its Special Drawing Rights (SDR). If it decides later this year to do so, the renminbi will have taken a giant step towards becoming a reserve currency—even though it unlikely by then to be freely convertible.
Although cross-border trade settlement in renminbi (i.e. on the current account) has been allowed since 2009, controls on cross-border flows on the capital account—i.e. for portfolio investment—remain in place. Various quota-controlled schemes such as the qualified foreign and domestic institutional investor (QFII and QDII) systems, a renminbi version of the former (RQFII), and “Stock Connect”—which links the Shanghai and Hong Kong equities markets—have been set up in recent years. The end result is a strange hybrid setup in which two markets, onshore (CNY) and offshore (CNH) renminbi coexist.
This might be seen as fascinating to investors, institutional and otherwise, but of little relevance to companies in their day-to-day operations. On the contrary: corporate usage of the currency is growing rapidly—the renminbi is the second-most-used currency for Volkswagen and General Motors, for example—and renminbi competence is rapidly becoming a necessity for any global business, rather than a nice-to-have. ASIFMA’s first panel of the day was on corporate, not investor, usage of the currency for quotidian business issues such as fixed-asset investment, trade and commodities settlement and working capital.
The growing importance of the renminbi to global businesses was revealed in our latest report, Generation ¥: RMB: the new global currency, published at the end of April. The research, sponsored by Allen & Overy, is based on a survey of non-Chinese corporate treasurers and finance executives. It shows that 90% think of the currency as important to their business, but 77% worry that poor understanding about the currency within their companies is an obstacle to its adoption.
They might well feel some anxiety, given the pace of change. For any companies that do business in China and have significant renminbi exposure, they must manage the risks of using the currency in a fast-changing environment—and one in which the kind of nuts-and-bolts infrastructure that you can take for granted when using the US dollar or the euro (such as hedging and credit instruments, and common technical standards), is still underdeveloped. They must also take account of rapidly changing regulations: will they miss out if they are not in the vanguard of companies using the liberalised currency regime in the Shanghai (and now Guangdong, Fujian and Tianjin) Free Trade Zone, or among the first to issue panda bonds onshore, for example? Is it worth making the effort now, or should they wait until all such restrictions and quotas are removed and the renminbi becomes freely convertible?
Read the full report for more insights on how companies are adjusting to the renminbi revolution—and for some fascinating in-depth case studies from global giants at the forefront of “Generation ¥” such as Daimler, Danfoss, Zurich, Hutchison Whampoa and others.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
