Small Change: The RMB and International Currency Use

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One of the key aspects of any cross-border trade is the decision of which currency to use. Despite the increasing prominence of China’s economy – poised to become the world’s second-largest economy and recently becoming the world’s largest exporter – use of China’s currency, the Renminbi (RMB), has failed to achieve similar distinction in international trade. Here an attempt will be made to evaluate the overall trend of the RMB’s use in the global marketplace.

Government imposed currency controls have gradually been reduced in China in order to enhance the RMB’s appeal. As of 2008, revenues from commercial transactions are fully convertible. In fact, all current account transactions – including international payments – have been eliminated. For private accounts, the limit for converting RMB into foreign currency has been raised from USD 10,000-USD 20,000 to its current level of USD 50,000.

Besides the easing of restrictions, China’s government has also advanced several initiatives to increase usage of the RMB internationally. In April 2009, the China Foreign Exchange Trade System (CFETS) was launched in conjunction with Reuters. This system allows member banks to trade the RMB against the US dollar, the yen, the Hong Kong dollar, the euro, and the pound sterling. Then in July, five Chinese cities – Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan – were authorised to settle international transactions in Chinese currency. Through these conduits, the RMB is being promoted for use in trade with Hong Kong and ASEAN nations. Also in 2009, China’s government engaged in currency swaps with Argentina, South Korea, Indonesia, Hong Kong, Malaysia and Belarus. The central banks of these countries now possess RMB 650 million worth of foreign exchange reserves to facilitate trade using China’s currency.

The results from these policy changes are still pending, yet data from the Bank for International Settlements (BIS) shows that the RMB is traded far less frequently than many of the world’s other currencies. As of 2007 the RMB was ranked 19th, behind even Poland’s zloty, the Danish krone and the New Zealand dollar in terms of exchange frequency. Average daily turnover for the RMB has been increasing, however, whereas trade in major currencies such as the yen and US dollar have declined. As a result of policy changes, in Hong Kong deposits denominated in RMB have increased - from RMB 895 million in early 2004 to RMB 62.7 billion at the end of 2009.

Select Currencies % Share of Average Daily Turnover* - BIS
Currency 2001 2004 2007
US dollar 90.3 88.7 86.3
Euro 37.6 36.9 37.0
Yen 22.7 20.2 16.5
Pound sterling 13.2 16.9 15.0
Swiss franc 6.1 6.0 6.8
Australian dollar 4.2 5.9 6.7
Indian rupee 0.2 0.3 0.7
Renminbi 0.0 0.1 0.5
Brazilian real 0.4 0.2 0.4
Other 25.3 24.8 30.1
* Because there are two currencies in every transaction, the total of each column equals 200%.
Source: BIS

To view the trend in currency usage from another angle, with more recent figures from the IMF, one can observe the composition of foreign reserves held at central banks. Although still an overwhelming favorite of central banks, holdings of the US dollar have fallen from a high of 56% of total counted reserves to around 36% as of Q3 2009. Similarly, the yen has declined from 5% to just under 2%. The share of ‘other’ currencies – the catch-all category that would include the RMB – has increased, but only to 1.7% of all foreign exchange reserves.

IMF-COFER graph.JPG Note: Unallocated, according to the IMF, is the sum of the total reserves from non-reporting countries, and discrepancies between reporters’ data as reported to COFER and to International Financial Statistics.

With the US dollar and yen gradually giving way (perhaps given its recent troubles, the euro as well), the trend – although unwinding only incrementally – seems to be one toward a wider array of currencies in use internationally. This shift, along with China’s policies for further integration with the world’s financial markets, will continue to increase the role of the RMB in cross-border trade, although not as rapidly as other aspects of China’s economy.

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