A new report from Aite Group, commissioned by Clearstream, found that over half of respondents think Europe as a whole, rather than a specific city, will play a key role in the renminbi’s internationalization process, though some are skeptical of the region’s long-term role once the onshore market is liberalized.
During the first and second quarter of 2014, Aite Group interviewed market participants from 24 firms in Europe and Asia to get their views on the internationalization of the renminbi, specifically related to the development of European offshore centers. The report says that the internalization of the currency will be a three-step process in which the currency is first used as a global trade and payments currency, then as a global investment currency and then as a global reserve currency.
As a trade currency, the renminbi is now the second most used currency for trade finance in the world, with the percentage of total global trade value settled in renminbi growing from 1.9% in January 2012 to 8.7% in October 2013. This increase was influenced by the Chinese government’s mid-2012 decision to lift the remaining restrictions on importing and exporting firms regarding trade settlement in renminbi. Dim sum bonds (bonds issued outside of Mainlaind China and denominated in renminbi) are also growing, with Aite Groupe estimating that by the end of the year, total issuance will be RMB 554 billion compared to RMB 375 billion in 2013. And 87% of respondents said that these bonds are “appealing.”
Within trade finance and payments, though, operational issues remain the biggest barrier to the use of renminbi, with 32% citing a lack of clearing broker readiness for operating in renminbi and another 32% saying translation issues are the main challenges.
“China has an agenda which is to be able to use the renminbi, potentially as a reserve currency, but definitely as a trading currency, and as a result, it creates momentum and increasing liquidity. From our perspective, this means we need to be able to have the financial products in order to service that new liquidity, and that’s what we at Clearstream want to invest in, but in order to do that, we need to better understand what are the market needs, and what we see from this report is a confirmation that the market players are asking for the sort of products that allow you to use renminbi in financial dealings, and that’s the work for the next few years,” says Marc Robert-Nicoud, member of the executive board in charge of strategy at Clearstream.
While Hong Kong and Singapore have been key for developing the offshore renminbi market, Europe continues to play a larger role, with 61% of respondents saying that Europe’s highly developed infrastructure is a primary appeal of the region as an offshore renminbi hub.
“I think when it comes to Europe, there was a demand from the financial centers in Europe – London, Frankfurt, Luxembourg – to really develop products around a newly emerging liquidity,” says Robert-Nicoud. “I think in the U.S., most of the dealings that the U.S. market has with the Chinese market are done in U.S. dollars, and I think there’s less openness to move away from that mode. In Europe, people are perhaps a bit more open to have currency like renminbi becoming the base trading currency as well. The answer to me is probably more a political one than a market/business-driven one.”
Going forward, the report says that many market participants believe that 2020 will represent a key turning point for the renminbi as an international currency, which is when it is likely to reach full convertibility on a global stage.
“There’s a path to renminbi being a currency that is freeflow. Until we get to that point, we are in a situation where the pool of offshore renminbi keeps growing, and I think the expectation raised in the study is that by 2020 we will have reached a point where the offshore and onshore renminbi will come back together as a single pooled currency, effectively achieving the consolidation of the two flows, and I think that’s what people expect,” says Robert-Nicoud. “Now is it 2020? I don’t know. Some people think it could be before, whereas probably a year or two ago people thought 2020 was very ambitious and probably too early.”
Europe Likely to Play Key Role in Internationalization of Renminbi
A new report from Aite Group, commissioned by Clearstream, found that over half of respondents think Europe as a whole, rather than a specific city, will play a key role in the renminbi’s internationalization process, though some are skeptical of the region's long-term role once the onshore market is liberalized.