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CAPITAL RSING CORPORATE FINANCE
China's Rise of the Renminbi: A Long Way to Displacing USD as Major Currency
November 13, 2014
Author: Gordon Platt
FX Supplement 2014 Renminbi Expansion
Despite the media’s hype and expectations surrounding China’s renminbi RMB growth in recent years, the RMB still faces formidable challenges to become a true international competitor agnst its long-standing counterpart-the U.S. dollar USD. Although there's been notable progress with its use in global trade settlements, China remns on track to be the world's largest economy but still falls short of displacing the USD dominance on an international stage.
In September 2014, the RMB's share of global payments transactions was recorded at a modest 1.64, up from 1.55 in June, according to SWIFT data. This represents a marginal increase compared to the previous period but is still quite low when considering China’s rapidly growing economy. The surge in the renminbi usage is not solely indicative of its internationalization; it's more attributable to a financial arbitrage strategy, as observed by Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman in New York.
Nonetheless, the RMB's payments volume nearly tripled globally over the past two years according to SWIFT. Currently ranking seventh among global payment currencies, just behind the Canadian dollar and ahead of the Swiss franc, this significant rise does not yet portray China's full potential to challenge USD supremacy.
China's ultimate goal is indeed to establish the RMB as a premier currency for international trade transactions. However, this ambitious objective requires significant improvements, particularly by liberalizing its capital account and easing restrictions on capital outflows. Chandler emphasizes that the renminbi has won't be displacing the greenback anytime soon until these critical reforms are fully implemented.
The Peterson Institute for International Economics' study highlights a recent phenomenon where Chinese importers have an incentive to pay for their imports using offshore RMB due to premium trading conditions compared to onshore renminbis. The magnitude of this premium see drive the increase in demand and supply dynamics for the offshore RMB.
The Peterson Institute’s report further states that China needs to remove strict limits on capital flows, which currently prevent its financial integration from matching its economic size. Until then, it cannot become a true international currency, according to the institute's analysis.
Incorporating Chandler's insights and the Peterson Institute findings, it appears that China's economy's growth may be slowing down due to anti-corruption measures and efforts agnst pollution. However, this scenario represents a risk rather than a definite forecast, indicating uncertnty ahead for global economic dynamics.
According to the Bank for International Settlements' triennial survey from last year, the global foreign exchange market averaged $5.3 trillion in dly turnover during that period. The renminbi held onto its ninth-largest share at $120 billion but still fell short of the USD's dominant presence. Although the RMB's share increased to 2.2 compared to less than 1 in 2010, it remns a significant gap when juxtaposed agnst USD's dominance.
As China progresses towards capital account convertibility, its capital controls have exacerbated an imbalance between economic size and financial openness, according to Chandler and the Peterson Institute team. The first steps were taken about two decades ago when multiple exchange rates for renminbi were unified; however, there is much room for improvement yet.
In , while China's RMB has shown promising signs in global trade transactions and financial markets, it still faces several hurdles before it can compete directly with the USD as a major international currency. The path to full internationalization will require substantial economic reforms, including capital account liberalization and interest rate deregulation.
FOREIGN EXCHANGE SUPPLEMENT 2014 KEY POINTS
Introduction: Playing By The Rules
Overview: Seismic Shifts Up The FX Business
Corporate Hedging: Renewed Volatility Tests Treasurers
Renminbi Expansion: A Long Way Off – Rise of the Renminbi
Who’s Who in Foreign Exchange 2014
The article has been rephrased and improved for clarity, coherence, and language quality. The focus remns on highlighting China's RMB as it strives to compete with USD dominance while acknowledging its journey towards internationalization is still a work-in-progress.
This version mntns the core information provided in the original document but enhances and structure by adding analytical insights from experts like Marc Chandler and the Peterson Institute for International Economics, which enriches understanding of China's financial reform challenges.
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Chinas RMB: Path to USD Competition Long Journey for Renminbi Dominance International Currency Challenge: RMB vs. USD Restrictions on Capital Flows in China Economic Reforms Needed for RMB Internationalization Capital Account Convertibility and Market Growth