World finance did not perform well in 2014, especially the European Union and the US economies, which have recovered slowly from the crisis. China's GDP growth started to slow down. Banks were concerned about their bad assets, after they developed their overseas business too rapidly. Gross profit ratio in Hong Kong and the whole offshore business had increased by at least 30%, which benefited from renminbi internationalisation to a large extent.
The internationalisation of the renminbi increased gradually in 2014. The amount of cross-border renminbi settlement in the first nine months of 2014 reached 4.8 trillion yuan, exceeding the year of 2013 at 4.6 trillion yuan. The range and size of actual receipts and payments in renminbi from third parties other than mainland China grew dramatically. Specifically, the levels of cross-border renminbi settlements between Germany, the UK and mainland China during the first seven months in the year of 2014 exceeded 140 billion yuan, with 100 billion yuan in Australia and the US. The growth is significant. The Bank of China (BOC) surveyed more than 3,000 domestic and foreign enterprises on their international renminbi business. According to the results, 41% of overseas enterprises carried out cross-border renminbi settlements with third parties outside of mainland China in 2014, exceeding 2013 by 31 percentage points. It is also reflected that settlements in renminbi were made by 8% of the surveyed overseas enterprises from Asean countries, Japan and Korea, 4% from Europe, and 2% from the US.
It is clear from the markets that global investors possess increasing confidence in holding renminbi. During the first 10 months of 2014, outstanding bond balance of offshore renminbi (CNH) reached 775.9 billion yuan, of which newly issued renminbi-denominated bonds amounted to 179.6 billion yuan. The BOC has successively issued renminbi-denominated bonds in Australia, France and Luxembourg. International investors oversubscribed eagerly, proving that the market pays a great deal of attention to renminbi business. In particular, the British government issued 3 billion yuan treasury bonds in October 2014 - the first time a foreign government has issued national debt in renminbi. The BOC participated as a lead arranger, and the issue achieved a high rate of oversubscription. The UK government has therefore taken the lead in using renminbi as a foreign exchange reserve.
Driven by reform
As China comprehensively reforms and adjusts its economic structure, future economic transitions will provide a lot of room for renminbi internationalisation. In the next five years, China is expected to import $1 trillion of goods, with foreign investment at more than $500 billion. This $500 billion is almost the size of total investments by China over the past 30 years, and will definitely be a strong impetus for renminbi internationalisation. China's total investment abroad now is approximately $650 billion.
China's ‘One belt, one road' initiative will unlock new models for regional corporations. As shown in the global customer survey by the BOC, around 87% of domestic enterprises and 69% of overseas enterprises plan to either use the renminbi in cross-border transactions or further increase the renminbi's settlement ratio in receipt and payment uses. These two figures have grown by 10% and 8% respectively compared with 2013.
Of the surveyed foreign firms, 41% acknowledged the renminbi becoming a vital global currency, similar to the US dollar and euro in status and function, an increase of 10 percentage points compared with 2013. After five years of prosperity, an increasing number of businesses have greater optimism regarding the renminbi's prospects and status as an international currency.
Benefits of internationalisation
With regard to cost savings, investment facility and capital allocation, the renminbi has become a new, superior choice for financial markets around the globe.
Firstly, cross-border financing facilities could effectively reduce the business costs for enterprises. Due to the cost differences between domestic and overseas productive factors, commercial banks can raise low-cost renminbi capital from overseas markets through the issuance of bonds, commercial paper, overseas loans under domestic guarantee and other bank loans.
In September 2013, a large international energy company needed financing for its programme in Zhuhai. The Bank of China's London branch co-led this company to issue a 1.2 billion yuan, five-year loan overseas and completed the examination and approval report procedures with the State Administration of Foreign Exchange for its domestic branches. The company then injected 1.2 billion yuan into its Zhuhai branch's account, taking only one month to issue the bonds from start to finish. The cross-border speed of renminbi flows has increased tremendously, and the programme saved the company about 123 million yuan over five years.
Second, investment facilitation has been boosting firms' global operations. Renminbi internationalisation has produced various investment facilities for companies, accelerating their global investments. This not only offers a good chance for domestic enterprises to expand overseas, but also provides a genuine opportunity for overseas companies to invest in the Chinese market. Commercial banks use numerous renminbi cross-border products to boost the development of foreign companies in China.
The Bank of China's Seoul branch collaborated with the Sichuan branch, releasing 200 million yuan in overseas direct loans for a Korean company's car factory programme in China, supporting the Korean company's cross-border investment programme in China, by meeting both the company's financing demands and lowering remittance risk.
Third, a two-way flow of renminbi across a border enables companies to freely transfer capital. The Shanghai Free-Trade Zone (SHFTZ) has eased policy restrictions on the pool of renminbi and foreign currency for its business customers. Transnational enterprises that are members of the zone can carry out two-way cash business between enterprise members both domestic and abroad. Capital in the pool can be transferred freely among its members. Since December 5, 2013 - when the BOC started up the first cross-border renminbi bidirectional capital pool business in the SHFTZ - it has engaged over 10 members, amounting to 10.5 billion yuan.
Renminbi internationalisation is rooted in international trade, and has benefited diversification - this internationalisation has already begun, for which the offshore construction market is an extremely important driving force. The BOC predicts that the renminbi capital pool overseas will increase from 2.5 trillion yuan to 3.0 trillion yuan in 2015 - part of which comprises an offshore market based mainly in Hong Kong with the possibility of exceeding 1.5 trillion yuan. With the gradual construction of a renminbi settlement system in other countries, the renminbi settlement ratio of China's exports and imports will increase further. Renminbi capital pools are steadily growing at home and abroad. In the case of the offshore renminbi bond market, the size of issued bonds in 2014 is set to surpass 200 billion yuan. The EU and US low-interest-rate environment will not change fundamentally, which should help maintain the issuing and trading vitality of global bond markets. And newly issued renminbi bonds are expected to rise to 300 billion yuan. Undoubtedly, the future evolution of renminbi internationalisation is closely connected with the currency's offshore development.
Further tapping potential and better meeting overseas demand, while expanding and deepening the renminbi's offshore market business, have become vital issues for the currency's internationalisation development.
Features of internationalisation
There are several major features of the renminbi's internationalisation that must be built upon.
First, the currency's offshore market has been further deepened. With an increasing number of Chinese companies venturing abroad, pushing forward the pace of building overseas industrial parks and launching projects such as foreign infrastructure construction, technical contracting and energy development, the industrial chain will be taken further abroad.
This expands the overseas use of the currency, making foreign renminbi product transactions even more active, while simultaneously helping the currency to remain and circulate abroad.
Second, the renminbi is in full swing in many offshore markets, and increasing with a larger number of products and transactions available. Offshore markets with an open and inclusive perspective continuously consolidate their financial centres' status, and are expected to remain leaders in renminbi offshore markets because of their promotion of trading facilities and systems, as well as by their taking advantage of new elements of the renminbi's internationalisation. With the currency's internationalisation bringing in tremendous profits to offshore centres, Europe, North America, South Korea and parts of South-east Asia are showing interest and actively seeking to develop offshore renminbi markets.
Third, the global service capacity of Chinese-funded financial institutions is a boost for constructing renminbi offshore markets. From a global perspective, the internationalisation of financial institutions is an essential support for domestic currency internationalisation, and a crucial participant in offshore markets. Chinese financial institutions are more familiar with businesses and individuals that invest outside China.
Large financial institutions, in particular, can offer more competitive pricing by interacting with both domestic and overseas institutions, in order to provide renminbi-related services such as cross-border renminbi settlement, trans-boundary financing and capital transactions - thereby better expanding and deepening transactions of all types of overseas renminbi products.
Fourth, improving the co-ordination of cross-border capital will be a vital prerequisite for a sustainable offshore market.
To develop offshore markets, flows of cross-border capital must be more frequent.
Free cross-border capital flows plus improved financial resource allocation efficiency would naturally extend arbitrage behaviour, and could even form an asset price bubble.
We can only create a beneficial market for renminbi internationalisation by preventing it from breaking away from the real economy's demands, preventing overstretching by efficiently managing cross-border renminbi-related risks, improving the international co-ordination of financial policies and the ability to cope with all kinds of external economic shocks. Renminbi internationalisation is an important mark of China's deepening reform and expanding opening-up process.
History has shown that reviving Chinese and world economic development will bring positive results for the reform of the international currency system.
All in all, the future for renminbi internationalisation has just got started. Carrying tremendous potential, the renminbi now ranks second in the world's most-used currencies in trade finance. Low as it may be on application in the global market, the development potential of the renminbi remains huge.
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