Questions over renminbi internationalisation
by Bhavin Patel
The renminbi at the end of July regained its position as the fifth most-used payments currency by value, after falling to sixth in June. According to the latest data release from SWIFT, the international interbank telecommunications provider, the renminbi made up 2% of global payments, a slight increase against 1.98% the previous month.
The currency has risen from ninth place since 2013, reflecting a more active use of renminbi in international trade and investment as well as its slowly developing role as a reserve currency. The relative strength of the renminbi has enhanced its value share of global payments. On a real trade-weighted basis the currency rose by around 20% against a basket of 61 other currencies between the end of 2011 and July 2017. Although the renminbi is around 10% below its late-2015 peak, it remains far above the historical norm.
The fall in the value of renminbi payments in June partly reflected the lower volume of trades financed by renminbi-denominated letters of credit, a good gauge of cross-border trade activity. SWIFT estimates the value of renminbi-denominated LOCs fell by 43% against a global decline of 33% between the start of 2014 and the end of June 2017. The fall was attributed to worsening commodity prices, for which LOCs are mainly used.
Another factor behind June’s figure was the fall in Chinese imports and exports over the previous year. In April 2017 the value of imports fell by 10.9% compared to April 2016. Domestic demand has remained weak despite an increase in infrastructure spending and strong credit growth this year. Likewise, Chinese exports to the US fell by 9% in April from the year before, though exports to the EU increased by 3% in the same period.
The return to fifth place for the currency in July was the result of the renminbi’s relative stability against other currencies. The value of all currency payments declined by 4.3% between June-July, while that of the renminbi fell by 3.7%, increasing its relative share.
Growing role for renminbi investments
Over the last few years the total number of renminbi payments has been increasing, reflecting continued strength in cross-border transactions and growing commercial exchange to and from China. SWIFT data show that over 1,900 financial institutions made worldwide payments in renminbi in June 2017, a 16% increase from June 2015.
Moreover, the currency has a growing role in cross-border investment. This trend has been underpinned by Beijing’s policy of internationalisation and dramatic changes in technology and financial infrastructure. The introduction of China’s cross-border interbank system in late 2015 has greatly improved the country’s connectivity with the rest of the world.
The initial system uses a global identifier that allows overseas banks to identify quickly proper payment routes when processing renminbi payments. Better compatibility has reduced manual processing, thereby improving the accuracy of cross-border payments and system processing efficiency, and lowering operational costs.
The planned upgrade of the system, in phase two, will be crucial to boosting renminbi clearing. This will be achieved by raising the number of participants from key offshore financial institutions, increasing operating hours and optimising participating institutions’ liquidity usage through the introduction of netting mechanisms.
Technology, supported by Chinese regulators, has further encouraged renminbi use. By the end of July 2017 regulators had issued 30 licenses to qualified digital companies to make cross-border payments. The development of financial technologies is expected to increase access for customers and businesses, boosting overall renminbi usage. The combined users of two of the largest Chinese fintech firms, WeChat and Alipay, add up to 1.3bn worldwide.
Renminbi use remains challenged
Despite the relative strength and stability of the renminbi, as well as the improvements in cross-border infrastructure over the past two years, the use of renminbi in global payments faces important challenges. Beijing’s priority is to maintain stability. Despite improving rules to enhance foreign investor access to the Chinese market, they remain unwilling to open further its capital account. Capital controls are likely to foreign investors and hamper domestic companies’ ability to invest abroad.
The renminbi has now developed official reserve curerency status following its admission into the International Monetary Fund's currency basket, the special drawing right. However, as the result of Beijing's pronounced caution about relaxing controls, there are considerable question marks about the pace of further internationalisation.
Bhavin Patel is Economist at OMFIF.