Renminbi to Become Top Five Currency by 2020

Terry Flanagan

Marc Robert-Nicoud, member of the executive board in charge of corporate strategy at Clearstream, excepts China’s renminbi to become a top five global currency by 2020.

Robert-Nicoud told Markets Media: “In the next few years there will be a gradual increase in RMB volumes and products and we expect that by 2020 RMB will be one of the top five currencies. Part of the excitement is that at some point the RMB will take its place on the international stage due to China’s size as a trading power.”

Clearstream commissioned consultancy Aite Group to carry out a survey, “Internationalizing the Renminbi: Weaving a Web for the Next World Currency.” Aite interviewed 24 firms on the internationalization of the renminbi and the development of European offshore centers.

Due to Chinese capital controls there are two versions of the renminbi with different exchange rates and interest rates and which are not fully fungible.The onshore yuan, CNY, is renminbi traded in mainland China, while the offshore yuan, CNH, is renminbi traded in other markets. The CNY exchange rate is controlled by the People’s Bank of China while the CNH is regulated jointly by the PBOC and the Hong Kong Monetary Authority and has a floating rate set by the market.

The report said: “The internationalization of the renminbi can be divided into a three-step process, with it initially being used as a global trade and payments currency, then as a global investment currency, and finally achieving status as a global reserve currency—but China remains tentative about reaching that final stage.”

“We commissioned the report to get a feel from the market on the level of momentum and challenges towards RMB being used more fully,” added Robert-Nicoud. “The market expects full convertibility in 2020 but there will be an increase in offshore RMB before that date and our services will be increasingly relevant for this pool before that date.”

In September 2010, RMB held outside mainland China became a full settlement currency in Clearstream. In March this year Clearstream’s owner, Deutsche Börse, and the Bank of China extended their strategic partnership which includes developing financial infrastructure to support the internationalization of the renminbi by promoting Frankfurt as the European offshore centre for the currency.

Robert-Nicoud expects a gradual growth in RMB transactions not tied to a Chinese counterparty and said it new RMB products are launched in the next few years.

“This month Bank of China Luxembourg issued a 1.5bn RMB bond in Luxembourg which was facilitated by Clearstream, and just recently Germany’s KfW bank issued its first RMB bond with a volume of 1bn RMB; we expect to see more of these type of deals in the future,” he added.

The KfW issue was the first RMB-denominated bond listed in the regulated market of the Frankfurt Stock Exchange allowing trading by more than 230 trading participants in 18 countries.

Virginie O’Shea, senior analyst in institutional securities & investments at Aite Group, told Markets Media there is increased investor appetite for dim sum bonds, RMB bonds issued outside mainland China. She said: “However there is still not much of a secondary market for dim sum bonds as investors buy them and hold onto them. As the market matures there will be more trading.”

The report said: “By year-end 2014, total issuance for the year will be RMB 554bn, up from RMB 375bn last year. The majority of survey respondents (87%) believe that dim sum bonds are ‘appealing.’ ”

More than half of the respondents believe that Europe will play a key role in the RMB’s internationalization due to its highly developed financial infrastructure.

The report said: “It is the crucial to facilitate the issuance, settlement and custody of RMB-denominated bonds in the European market, as well as to further develop RMB-denominated products and collateral management services, thereby offering market players the opportunity to optimise their access to what is still a limited volume of offshore RMB.”

Financial centers in Europe are competing to become the offshore hubs for RMB. Zurich wants to become a private banking center for Chinese clients while Luxembourg, the European center for fund servicing, was chosen by three major Chinese banks—Bank of China, ICBC, and China Construction Bank —as their European headquarters.

In March this year the Bundesbank, the German central bank, and the PBOC signed an agreement to set up a clearing bank in Frankfurt and Paris received a €9bn quota for renminbi investment as it aims to become a gateway to Africa for Chinese companies.

In the same month the PBOC announced plans to set up a clearing bank in London, the global center for FX activity. The report said: “This may grant the currency a further avenue for growth within the FX sphere.”

According to the Bank for International Settlements the renminbi was the ninth most actively traded currency in the world in April 2013, and made up 2.2% of average daily global turnover in the FX markets for that month.

O’Shea added: “Banks and asset managers are aware of the potential revenue opportunities but also need to commit resources to set up operations.”

Featured image via Jason Wesley Upton/Flickr under Creative Commons

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