Renminbi set to become a global currency

But Beijing still wary of making it fully convertible

The Business Times, February 14, 2011 

(SHANGHAI) Now that it has passed Japan to become the world's second- largest economy after the United States, China is considering the next step as a world power: making its money a global currency. 

Gaining acceptance: Some cross-border trades with
 China can now be settled in renminbi so that trading
partners do not have to convert in and out of US dollars

No one expects that to happen immediately. And the Chinese government is wary of making some of the free-market moves that would enable the renminbi to take its place alongside the US dollar, euro and yen as a fully convertible reserve currency.

Still, over the past year Beijing has begun to loosen its tight currency controls. For the first time, for example, US companies like McDonald's and Caterpillar have been allowed to finance their China projects by selling renminbi-denominated bonds in Hong Kong.

Meanwhile, in Russia, Vietnam and Thailand, some cross-border trades with China can now be settled in renminbi so that trading partners do not have to convert in and out of US dollars. One pilot programme lets Russian companies like Sportmaster, a retail chain based in Moscow, buy or sell goods using the Chinese currency.

And in New York, the Chinese government has permitted an overseas branch of Bank of China to accept deposits in renminbi. That enables depositors outside China to bet on a currency widely expected to appreciate against the greenback over the next few years.

'This is all encouraging the internationalisation of the renminbi,' Kelvin Lau, a Hong Kong-based economist at Standard Chartered Bank, said of Beijing's recent moves. 'They want to make the Chinese currency a popular currency.'

At Thursday's exchange rates, the renminbi was trading just below 6.59 to the US dollar - a level that many experts say values the Chinese currency artificially low, as a result of Beijing's intervention efforts.

Five years ago, the renminbi was trading at slightly more than eight to the dollar - more than 20 per cent higher than now.

Beyond bragging rights, China has economic motives for trying to go global with the renminbi. Analysts say the moves, if successful, could strengthen China's influence in overseas financial markets and begin to erode the dollar's dominance.

Beijing could also eventually reap the rewards, like cheaper debt financing, that come with being recognised as a world reserve currency.

Global investors eager to bet on China's growth story, meanwhile, could find that looser controls on the renminbi make it easier to invest directly in bonds and other assets denominated in renminbi.

And importers and exporters could cut their currency-fluctuation risks by settling China-related trade deals in renminbi rather than in dollars or euros.

Robert Mundell, a Nobel laureate economist whose research is credited with helping to develop the euro, says the renminbi's rise is all but inevitable.

'The RMB is likely to become a reserve currency in the future, even if the government of China does nothing about it,' Mr Mundell said in a response to questions. He noted that the renminbi is already a regional currency in South-east Asia, where China has become the dominant trading partner of many countries.

But analysts caution that right now the renminbi is far from ready to mount a serious challenge to the US dollar as the world's leading reserve currency. For one thing, China needs to assure investors that its political system is stable and that its economy still has plenty of growth ahead.

China has been reluctant to make its currency fully convertible because its banks and financial system are still immature. What is more, allowing money to flow in and out of the country with few restrictions would effectively mean surrendering control over vital aspects of the state-run banking system. -- NYT