RMB – A Future International Currency?
Date: 24 February 2014
A presentation by Madame Hu Xiaolian, Deputy Governor of the People’s Bank of China (PBOC), currently visiting New Zealand as the Prime Minister’s China Fellow for 2014.
Madame Hu Xiaolian presented to the Victoria Business School and New Zealand Contemporary China Research Centre a discussion of the history, background and prospects of the internationalization of the RMB.
The talk outlined the history of RMB internationalization beginning in the 1980s as the RMB was increasingly used to settle trade in Hong Kong, Macao, Myanmar, Vietnam, Mongolia and Russia. By the 1990s, and especially after WTO accession, China gradually relaxed restrictions on the cash outflows of RMB and by 2005 this had risen to 20,000 per person.
In 2003, the PBOC created RMB clearing arrangements in Hong Kong, including RMB deposits, currency exchange, bankcard services, and remittance. By 2007, the Ministry of Finance had RMB denominated bonds in Hong Kong.
Then in 2009, a Pilot Program in Cross-Border Trade Settlement gradually extended the number of cities and enterprises, as well as the type of transactions and foreign areas that could use RMB to settle foreign trade. By 2012, all enterprises in all parts of China could use RMB to settle foreign trade in any part of the world. This led to increases in the share of foreign trade settled in RMB and to increases in the share of foreign investment and overseas investment denominated in RMB.
Madame Hu then moved on to discuss the development of the offshore RMB market, including overseas deposits in RMB, and RMB denominated bond, stock, FX and derivative markets. By the end of 2013, the international organizations SWIFT and BIS had ranked the RMB as the 8th and 9th most traded currencies in the world.
Currency agreements have also been an important feature of the history of the internationalization of the RMB. These include the 23 currency swap agreements with central banks, mostly within the region, and the bilateral local currency settlement agreements with 9 central banks. There is now direct trading of RMB with a number of currencies in the region and the RMB acts as a reserve currency within the foreign reserve of 26 countries. International organizations such as the World Bank now invest in China using RMB.
As background to the internationalization of the RMB, Madame Hu asked why the RMB is now so widely accepted, and identified two drivers. The first is the strengthening of the Chinese economy as shown by growth in GDP, trade and ODI/FDI. The second catalyst for the internationalization of the RMB was the Global Financial Crisis from 2009 as investors became less confident about the major global currencies and looked to diversify their investments.
Madame Hu then highlighted new opportunities for RMB use as China’s economy changed track from rapid growth to more sustainable growth driven by ongoing economic reform, urbanization and stable macro-economic policy. The basic driving force for RMB use therefore comes from demand to mitigate exchange rate risk and reduce operational costs.
The prospects for ongoing internationalization where then discussed with reference to four necessary but not sufficient conditions for an international currency.
First, the RMB will need to be fully convertible. In December 2006, the RMB achieved current account convertibility. Today, of the 40 items listed by the IMF, the RMB has achieved convertibility in 75%. The Third Plenum produced a clear message to accelerate convertibility in the coming years. As the Chinese exchange rate moves toward equilibrium, as shown by a 35% appreciation against the US dollar since the 2005 reforms, it is clear that the market is continuing to play a greater role in Chinese exchange rate convertibility. Moreover, interest rates have been liberalized and restrictions now remain only on the deposit side.
Madame Hu then discussed the three remaining conditions: having a deep and liquid financial market; a flexible pricing mechanism, especially the exchange rate and interest rate; and, effective risk management. The talk concluded with discussion of the prospects of further internationalization of the RMB in the coming years, the opportunity for New Zealand investors and traders in this trend and the focus in China for RMB management to follow the market trend.
The talk was concluded with closing comments from the BNZ Chair in Business in Asia, Professor Siah Hwee Ang.
About the speaker
Madame Hu Xiaolian is one of six deputy Governors of the People’s Bank of China (PBOC), and has particular responsibility for monetary policy. Mme Hu received an MA in economics from the Graduate School of the People’s Bank of China in 1984, one of 18 students in the inaugural class during a period when China was undergoing major economic reform.
After graduation, Hu joined the State Administration of Foreign Exchange (SAFE), where she held posts including deputy director general of the Policy and Regulation Department, and director general of the Reserve Management Department. In 1999, she became a Chinese Communist Party committee member for SAFE.
In 2004, Hu became assistant to the governor of PBOC and a PBOC Party committee member. In 2005, she was promoted to Administrator of SAFE. She became a PBOC deputy governor in 2009. Hu was elected an alternate member of the Chinese Communist Party Central Committee at the 18th National Party Congress in November 2012.
During the 1980s, Mme Hu worked in New Zealand as an intern at the Reserve Bank of New Zealand when Don Brash was Governor.