Ex­change rate re­form puts the seal on yuan’s ad­vance

China Daily (Hong Kong) - - BUSI­NESS - By EVE­LYN YU in Hong Kong eve­lyn@chi­nadai­lyhk.com

On the sec­ond an­niver­sary of the C hi­nese main­land ’s e xchange rate re­form, the mar­ket is still quiv­er­ing over the yuan’s sin­gle day fall of 1.87 per­cent against the US dol­lar, trig­gered by the cen­tral bank’s abrupt de­ci­sion on Au­gust 11, 2015 to re­form the ren­minbi’s mid­point rate de­ter­mi­na­tion mech­a­nism.

But, fi­nan­cial ex­perts have hailed the move by the Peo­ple’s Bank of China (PBOC) as a pos­i­tive ef­fort to push the yuan onto the global stage.

The mar­ket-ori­ented re­form, while peg­ging the yuan against a bas­ket of cur­ren­cies, rather than the green­back, not only con­trib­utes to the sta­bi­liza­tion of the cur­rency in the longer term, but also marks a mile­stone in ren­minbi’s in­ter­na­tion­al­iza­tion, said Cheng Shi, chief econ­o­mist at ICBC In­ter­na­tional.

“T he marke t calls for a mul­ti­lat­eral global cur­rency regime. But, we don’ t need an­other shadow cur­rency of the US dol­lar, such as the Hong Kong dol­lar. To qual­ify as a world cur­rency, its for­ma­tion mech­a­nism should be en­doge­nously driven, thus, de­tach­ing it­self from the US dol­lar is a big step to­ward ren­minbi go­ing global.”

The mo­men­tum in China’s long-term goal to make the yuan a global cur­rency, which seemed to have slowed down in the past two years amid de­pre­ci­a­tion pres­sure, has picked up this year with the cur­rency hav­ing sta­bi­lized.

Ac­cord­ing to the So­ci­ety f o r Wo r l d w i d e In t e r b a n k Fi­nan­cial Telecom­mu­ni­ca­tion (SWIF T ) RMB tracker, the yuan’s share as an in­ter­na­tional pay­ment cur­rency had fallen from 2.31 per­cent in 2015 to 1.68 per­cent late last year. But, RMB bounced back in May this year as the sixth most ac­tive cur­rency for global pay­ments, with a 1.61-per­cent share — a slight in­crease from 1.60 per­cent in April. The US dol­lar still held a dom­i­nat­ing share of 42.09 per­cent in in­ter­na­tional pay­ment as of late last year.

Cheng noted there’s still no con­sen­sus on con­crete in­di­ca­tions of a “world cur­rency” sta­tus, say­ing the marke t won’t have “strong feel­ings” of RMB in­ter­na­tion­al­iza­tion un­til the c ur­rency had hit 20 per­cent in in­ter­na­tional trades and pay­ment. The process has a long way to go, but he sees a steady up­ward trend but­tressed by the main­land’s eco­nomic strength.

“In the next 10 years, China will be trans­form­ing from the world’s sec­ond-largest econ­omy to the big­gest — that’s a pre­con­di­tion for the yuan’s in­ter­na­tion­al­iza­tion.”

A c c o r d i n g t o t h e Wo r l d Bank, the US gross do­mes­tic prod­uct in 2016 stood at $18.57 tril­lion, while that of the Chi­nese main­land was $11.2 tril­lion. The gap is nar­row­ing as China is grow­ing at a rate of 5 to 6 per­cent an­nu­ally com­pared with 2 to 3 per­cent for the US, said Cheng.

The mam­moth China-led Belt and Road (B&R) Ini­tia­tive also tes­ti­fies to the fact that the main­land is trans­form­ing from trade driven to in­vest­ment driven in the yuan’s in­ter­na­tion­al­iza­tion process, he pointed out.

The yuan has hit a new high against the US dol­lar this year, reach­ing 6.7251 as of July 27 — the strong­est in nine months since Oc­to­ber 14, 2016. The main­land has seized the op­por­tu­nity to launch var­i­ous poli­cies to open up its cap­i­tal ac­count and ac­cel­er­ate the cur­rency’s go­ing global ef­fort. And, Hong Kong is play­ing a ma­jor role as the big­gest off­shore ren­minbi cen­ter.

In Jan­uar y this year, the PBOC is­sued a doc­u­ment en­ti­tled “Mat­ters Con­cern­ing Cross-Bor­der Fi­nance and Its Macro-pru­den­tial Man­age­ment”, which pro­moted the flow of funds into the main­land by rais­ing the lever­age ra­tio of cross-bor­der fi­nanc­ing from 1 to 2.

The Bond Con­nect — the third se­cu­ri­ties trad­ing link be­tween Hong Kong and the main­land that al­lows pur­chases of Chi­nese bonds in Hong Kong — kicked off on July 3, with 7 bil­lion yuan ($1 bil­lion) of trad­ing on its launch day,

The mam­moth China-led Belt and Road Ini­tia­tive also tes­ti­fies to the fact that the main­land is trans­form­ing from trade driven to in­vest­ment driven in the yuan’s in­ter­na­tion­al­iza­tion process.”

Cheng Shi, chief econ­o­mist at ICBC In­ter­na­tional the value of trad­ing through the Bond Con­nect on its launch­ing day

ac­cord­ing to the cen­tral bank.

A day later, the State Coun­cil raised Hong Kong’s Ren­minbi Qual­i­fied For­eign In­sti­tu­tional In­vestor (RQ­FII) quota from 270 bil­lion to 500 bil­lion yuan.

“The open­ing up of the do­mes­tic bond mar­ket is a key sign of a cur­rency’s in­ter­na­tion­al­iza­tion. The scheme of­fers a new av­enue for for­eign in­vestors to buy Chi­nese bonds and hold yuan-de­nom­i­nated as­sets, which will also el­e­vate ren­minbi’s sta­tus as a re­serve cur­rency,” said Ying Jian, se­nior econ­o­mist at Bank of China (Hong Kong).

S i n c e t h e In t e r n a t i o n a l Mon­e­tary Fund be­gan track­ing ren­minbi in global for­eign cur­rency re­serves, the amount had surged from $84.435 million in the fourth quar­ter of 2016 to $88,535 in this year’s first quar­ter, ac­count­ing for 1 per­cent of al­lo­cated re­serves.

With the open­ing up of the stock, bond and gold mar­kets, Ying said the next step is to give for­eign in­vestors ac­cess to the com­modi­ties and de­riv­a­tives mar­kets, stress­ing that in­te­grat­ing the do­mes­tic mar­ket with the rest of the world is cru­cial to ren­minbi go­ing global.

The main­land opened its gold marke t in Septem­ber 2014 when the Shang­hai Gold Ex­change set up an in­ter­na­tional board. For­eign in­vestors can open trad­ing ac­counts de­nom­i­nated in ren­minbi in Shang­hai’s free-trade zone and trade di­rectly through the board. The coun­try’s com­mod­ity ex­changes re­main re­served for do­mes­tic in­vestors.

Hong Kong, as the big­gest off­shore ren­minbi cen­ter with more than 70 per­cent in off­shore ren­minbi pay­ments, has a role to play in ac­cel­er­at­ing the process.

Cheng and Ying agreed that Hong Kong should get more in­volved in the coun­try’s mam­moth projects, like the B&R Ini­tia­tive.

Pres­i­dent Xi Jin­ping told the Belt and Road Fo­rum for In­ter- na­tional Co­op­er­a­tion in May that China would con­trib­ute more than 840 bil­lion yuan to the B&R project through the Silk Road Fund and of­fer spe­cial ren­minbi loans, of­fer­ing strong im­pe­tus for in­ter­na­tional use of ren­minbi.

Lob­by­ing var­i­ous B&R funds to open up of­fices in Hong Kong and im­prov­ing clear­ing ser­vices and sys­tems are plau­si­ble ways that Hong Kong can adopt to win a bigger role in pro­mot­ing ren­minbi in­ter­na­tion­al­iza­tion.

But, in Ying’s view, there’s still a long way to go in ren­minbi in­ter­na­tion­al­iza­tion. The ul­ti­mate goal can be achieved given the main­land’s ris­ing eco­nomic clout. The process may see twists and turns, but the up­ward trend is un­changed.

Hong Kong’s RQ­FII (Ren­minbi Qual­i­fied For­eign In­sti­tu­tional In­vestor) quota

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