Currency Express

By+Zhou+Xiaoyan

Against the backdrop of Chinas speedy accumulation of weight and influence in the global economy， the countrys currency is taking the fast lane to becoming more globally used in cross-border trade clearing and settlement and as a reserve currency.

On October 27， China announced direct trading between the yuan and Singapore dollar beginning October 28. With direct trading of their currencies， both China and Singapore will be less dependent on the U.S. dollar to settle bilateral trade and investment deals.

On October 21， Britains first sovereign bond in Chinese renminbi was listed on the London Stock Exchange for secondary market trading. Britain became the very first Western country to issue a government bond denominated in renminbi.

Prior to that， on October 14， the British Treasury carried out its debut issuance of renminbi bonds， with a total worth of 3 billion yuan（$490 million） and a maturity period of three years. Strong demand pushed up orders to 5.8 billion yuan （$950 million）， lowering the yield to 2.7 percent from a targeted 2.9 percent.

A promising future

Chinese Ambassador to Britain Liu Xiaoming said the occasion had turned a new chapter in the story of the yuans internationalization as a reserve currency， and would further bolster China-UK economic cooperation.

Andrea Leadson， Economic Secretary to the British Treasury， said the move would renew Londons status as a global financial center and major offshore renminbi hub， and encourage other countries to develop renminbi bond markets.

Over the past five years， the internationalization of the yuan has notched up a number of achievements.

According to the Peoples Bank of China（PBC）， Chinas central bank， yuan settlement in cross-border trade totaled 4.8 trillion yuan（$785.4 billion） in the first three quarters of 2014， making the currency the worlds second most popular for cross-border payments.

China has also promoted the expansion of currency swap agreements and direct trading between its yuan and other currencies as well as the establishment of offshore yuan hubs.

On October 9， the PBC signed a currency swap agreement with the Russian central bank worth 150 billion yuan （$24.4 billion）. To date， China has signed similar agreements worth a total of 2.9 trillion yuan （$472 billion） with 26 overseas monetary authorities， according to the PBC.

The PBC has also authorized offshore renminbi clearing and settlement arrangements in Singapore， London， Frankfurt， Seoul， Paris and Luxembourg， as well as regions such as Taiwan， Hong Kong and Macao.

By now， the renminbi has established direct trading with U.S. dollar， the euro， the British pound， the Japanese yen， the Australian dollar， the New Zealand dollar， the Malaysian ringgit， the Russian ruble and the Singapore dollar.

Hu Xiaolian， vice Governor of the PBC， said the yuan has become the seventh largest reserve currency in the world.

“The rapid development of cross-border renminbi business has been fundamentally driven by surging market demand，” Hu said.“As the Chinese economy takes part in economic globalization， companies have developed a strong desire to use the renminbi for cross-border trade settlement in order to avert risks and lower costs. This will lead financial institutions， both Chinese and overseas， to provide more customized renminbi- denominated financial services.”

According to a report from the International Monetary Institute（IMI） under Renmin University of China， the yuan is expected to become the worlds third largest currency， second only to the U.S. dollar and the euro， in the next three to five years.

Li Daokui， Dean of The Schwarzman Scholars Program at Tsinghua University， also predicted that the yuan will become one of the three most important currencies in the world within half a decade.

“In the next five years， cross-border use of the renminbi in financial sector will be a breakthrough in the currencys internationalization，”Li said. “If no major crises occur， I foresee the RMB becoming as important as the U.S. dollar and the euro in the international financial community through supplanting the Japanese yen and the British pound in trade settlement and in financial transactions.”

Not so fast

Although the renminbi has made remarkable strides， it lags far behind in terms of being used in investment and as a reserve currency， read a report from Beijing-based Anbound Consulting.

People shouldnt have their heads turned because of the stunning success made in renminbi cross-border clearing and settlement， read the report.

According to the report， the internationalization of the renminbi requires supporting systems such as a globalized legal system and policies and institutional arrangements in the financial sector. Chinas regulatory authorities and financial markets are far from being ready in this regard. Right now， they fear the overseas use of the renminbi will deal a heavy blow to domestic monetary policies， read the report.

The purpose of the yuans internationalization shouldnt be to replace the U.S. dollar or the euro， but to add more flexibility to the international monetary system in a volatile international financial market. In the future， the international monetary system will be more diversified and no currency will be able to dominate the system as the U.S. dollar currently does. Becoming an international currency means incurring more risks as well as taking on more responsibility， read the report from Anbound Consulting.

Xiao Lei， a financial commentator， said use of the yuan as a reserve currency has a lot of catching up to do compared to its employment in cross-border trade settlement.

“In order to realize complete globalization of the currency， large strides should be made on reforms of Chinas financial markets， including the stock market， bond market， banking system and the money market. Whether or not the renminbi era will arrive and how soon that happens largely depends on how successfully Chinas financial reforms are carried out，” Xiao said. “Its not a war against the U.S. dollar， rather a war within the country.”

Tan Xiaofen， an associate professor in finance at the Beijing-based Central University for Finance and Economics， said the yuan becoming a top trade settlement currency represents only a preliminary stage in its internationalization.

“An international currency should have three functions： firstly to be used in trade settlement； then to be used in investment， as in the issuance of renminbi-denominated bonds； and finally as a reserve currency，” Tan said.

Tan said this requires more from Chinas domestic financial markets. He said the reason the U.S. dollar enjoys such an unshakable global status can be a large extent attributed to its highly refined and developed financial markets， which can draw much foreign investment.

“In addition， the internation- alization of the yuan should be driven by the demand of the real economy， ordinary people， businesses and financial institutions， rather than being spearheaded by the government，” he said.

Lian Ping， chief economist at the Bank of Communications， said conspicuous imbalances have to be taken into consideration concerning the internationalization of the yuan. Renminbi settlement in cross-border trade is mainly used in trade between China and the Association of Southeast Asian Nations， but not so much in Chinas trade with its major trade partners the EU and the United States. Meanwhile， the size of offshore yuan markets is very limited and the renminbi backflow system still needs to be improved.

Lian said whether or not the yuans internationalization will make substantive progress in the next five years depends on many variables， which include improving Chinas financial markets， steadily pushing forward convertibility under the capital account， developing offshore yuan hubs， optimizing the yuan backflow system， accelerating market-oriented reforms on interest rates and exchange rates and expanding outbound investment using yuan.

“The internationalization of the yuan cant be accomplished in one fell swoop. It would be impractical to expect instant success，” Lian said.