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Coming to a bank near you: globalization of the Renminbi.

It`s simply a question of when the renminbi (RMB) will become a global currency rather than if. The Internationalization of the RMB is an inevitable progression for an international economic power such as China. Its currency, which is still carefully managed by the government, has a market share well behind the US dollar and the euro and currently barely traded on foreign exchange markets. But volumes are climbing steadily and all the signs point towards the RMB gaining greater stature as a stable reserve currency of choice.


Late last year, as the world’s largest exporter and manufacturer, the RMB overtook the euro to become the second most used currency in global trade finance after the dollar, according to the Society for Worldwide Interbank Financial Telecommunication. And it also became the ninth most traded international currency.

China’s tight control on the nation’s capital account: the flow of funds both in and out of the country, seems to be the only outstanding issue in the RMB`s rise. Whilst international trade goes some way in redressing the balance, China needs a more efficient and most importantly, transparent, financial market.

The currencies of countries that play a major role in world trade have tended to become reserve currencies, i.e. held in significant quantities by national banks to protect nations against currency fluctuations. Central banks are now beginning to hold part of their foreign exchange reserves in RMB, albeit in small amounts, and the People’s Bank of China has set up 24 arrangements with international counterparts to allow it to swap the RMB in exchange for their own currencies.

China has begun to loosen its control over its financial markets and gradually open up access to its onshore markets. In 2007, the Chinese government began issuing RMB-denominated notes, bonds and funds, known as “dim sum bonds,” in Hong Kong. Since 2009, companies in Mainland China have been able to complete cross-border trade in RMB which allows companies to reduce transaction costs, better manage foreign exchange risks and speed up payments.

The reduced influence of the US dollar and diversification of currency reserves are key, if we are not to see a repeat of the 2008 financial crisis hit Asian Central banks again. More choices in international reserve currencies provide greater checks and balances to the international financial system worldwide.

While there are obvious benefits from the RMB challenging the dollar’s dominance, there are also numerous risks, predominantly the ability of Chinese policymakers to have total control of the economy, as has been the case for the last 30 years.  Secondly currency fluctuations can impinge significantly on China export sector which is already suffering from higher labour cost.

Countries are going to need to be able to trade in something besides dollars. It simply makes sense that if a large proportion of an emerging-market country's trade is with China, it should do its trades in RMB. However the key is stability in monetary policy and China`s need to make its currency reserves work on the international stage.




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