Ren­minbi may be­come global re­serve cur­rency

China Daily (Canada) - - BUSINESS - By CE­CILY LIU in Lux­em­bourg ce­cily.liu@chi­nadaily.com.cn

The ren­minbi could ri­val the US dol­lar as a leading in­ter­na­tional re­serve cur­rency de­spite ob­vi­ous chal­lenges, said Yves Mer­sch, a mem­ber of the Euro­pean Cen­tral Bank’s ex­ec­u­tive board.

De­liv­er­ing a key­note speech on Wed­nes­day at The Lux­em­bourg Ren­minbi Fo­rum, Mer­sche said that the cur­rency’s in­ter­na­tion­al­iza­tion is just be­gin­ning, but it’s mov­ing fast.

“Clearly, hav­ing be­come an im­por­tant trad­ing and pay­ment cur­rency, the ren­minbi is now tak­ing the first steps to­ward es­tab­lish­ing it­self as an in­ter­na­tional in­vest­ment cur­rency. If it can do so suc­cess­fully, it might one day be­come a leading re­serve cur­rency,” he said.

China’s push to in­ter­na­tion­al­ize its cur­rency started in 2008, when the global fi­nan­cial cri­sis demon­strated the dan­ger of ex­ces­sive re­liance on the US dol­lar.

China soon be­gan to en­cour­age the use of its cur­rency in in­ter­na­tional trade, swap ar­range­ments among cen­tral banks, and bank de­posits and bond is­sues in Hong Kong.

Euro­pean businesses in­creas­ingly started to in­voice Chi­nese sup­pli­ers us­ing the yuan, cre­at­ing a grow­ing off­shore pool of the cur­rency in Europe. With the ex­pan­sion of Chi­nese banks in Europe, yuan-de­nom­i­nated trade fi­nance and in­vest­ment prod­ucts are also in­creas­ingly avail­able.

“Trade in off­shore ren­minbi has boomed. In­creas­ing Chi­nese ex­ports also led to a surge in de­mand for ren­minbi out­side China as Chi­nese ex­porters in­creas­ingly ex­pect to be paid in their own cur­rency to elim­i­nate ex­change risks,” Mer­sch said.

But he added that the growth of off­shore yuan ac­tiv­ity faces chal­lenges, one of which is the frag­men­ta­tion be­tween the on­shore and off­shore mar­kets.

The on­shore cur­rency isn’t freely con­vert­ible, un­like the off­shore pool of ren­minbi. Ex­change rates are also dif­fer­ent.

“Off­shore and on­shore mar­kets are only par­tially in­te­grated so far. This re­sults in small but per­sis­tent dis­crep­an­cies in ex­change and in­ter­est rates be­tween the on­shore mar­kets and off­shore mar­kets,” Mer­sch said.

Mar­ket frag­men­ta­tion also cre­ates liq­uid­ity risk, such as when an off­shore in­vestor faces a “sud­den and tem­po­rary ren­minbi short­age that can­not be met by quick trans­fer­ring from the main­land”, Mer­sch said.

Mer­sch said the ren­minbi swap line signed be­tween the ECB and the People’s Bank of China last Oc­to­ber will help to ad­dress this liq­uid­ity prob­lem. The swap line is valid for three years and has a max­i­mum size of 350 bil­lion yuan ($57.1 bil­lion).

Swap agree­ments al­low cen­tral banks to ad­dress liq­uid­ity prob­lems. Ren­minbi swap lines with for­eign cen­tral banks boost over­seas in­vestors’ con­fi­dence in yuan­de­nom­i­nated in­vest­ments.

Mer­sch added that fur­ther lib­er­al­iza­tion of fi­nan­cial flows by China would pro­mote fur­ther in­te­gra­tion of the on­shore and off­shore mar­kets.

He said the in­te­gra­tion of the cur­rency into the world fi­nan­cial sys­tem would re­quire con­tin­ued de­vel­op­ment of the rel­e­vant pay­ment in­fra­struc­ture, and ul­ti­mately the in­te­gra­tion of on­shore and off­shore ac­tiv­i­ties, so that cross-bor­der ren­minbi pay­ments can be pro­cessed quickly and ef­fi­ciently.

Euro­pean reg­u­la­tors are also striv­ing to de­vise ap­pro­pri­ate meth­ods to reg­u­late grow­ing yuan-de­nom­i­nated trans­ac­tions in the eu­ro­zone, Mer­sch said.

The in­creas­ing pres­ence of Chi­nese banks in the euro area also brings its own chal­lenges re­gard­ing bank­ing su­per­vi­sion, in­clud­ing the need for greater in­ter­na­tional co­op­er­a­tion and ex­change of in­for­ma­tion, he said.

Mer­sch said the yuan’s in­ter­na­tion­al­iza­tion could have a sig­nif­i­cant im­pact on the in­ter­na­tional fi­nan­cial land­scape.

But he warned that “it is too early to say what the im­pli­ca­tions for in­ter­na­tional fi­nan­cial sta­bil­ity could be”.

SI WEI / FOR CHINA DAILY

A clerk counts cur­rency at a bank in Ganyu county, Jiangsu prov­ince, ear­lier this month.

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