The Renminbi: What Does the Future Hold?
Sam Xu, head of transaction banking China at Standard Chartered Bank, believes the slowdown in China is the new norm. “There is a strong desire from the government to convert the export-led, low-cost economy into a more sophisticated, consumption-led, innovative economy,” he says. “Given the size of the economy, however, there is a slowdown.”
Turning more specifically to the RMB, Xu says greater internationalization is possible and three things are necessary for it to happen. First, domestic interest rate management needs to change. The second is an expected expansion of the foreign exchange trading band, to 3%. And the third is the capital account, where there has been a simplification in the foreign direct investment (FDI) process and restrictions on conversion of capital proceeds into RMB have gone away.
Focusing specifically on Singapore’s role in RMB internationalization, Monetary Authority of Singapore (MAS) International Department Executive Director Valerie Tay says Singapore has taken a step-by-step approach, as a partner to China in internationalization and also working with industry to put in place policy measures to support growth. “We became the largest RMB center outside China and Hong Kong,” she says. “We think that given the structural drivers in China to increase RMB centers and to push capital account liberalization and to set up [China International Payment System (CIPS)], these three bear us to remain optimistic on offshore RMB.”
Asked about the likelihood of the IMF including the RMB in SDRs, Tay said the IMF has said it is a matter of time. “They have two criteria. One is exports. China has been assessed to have met. The second is (being) freely usable. The RMB is one of the most traded currencies and widely used for payments. These are good signs that the RMB is headed in that direction,” she says.
Chris Ke, managing director, Sinopec Century Bright Capital Investment, says his company set up one of its RTCs in Singapore because it is one of the most important financial centres, has a tax rate of 10%, and is an important trading hub. While the company has made progress in expanding usage of the RMB, foreign buyers are reluctant to accept RMB as the invoicing currency and the price of energy is dominated by the US dollar. “The ongoing challenge is finding uses for the RMB we hold,” he says.
Perhaps confirming Ke’s remarks, 49% of participants say they have no plans to increase adoption of the RMB in payments, cash pooling or trade, while 30% say they would adopt the RMB in six to 12 months and 21% say they would adopt the RMB within six months.
Standard Chartered Bank Head of RMB Solutions Carmen Ling says that in the early part of RMB internationalization, the key driver was arbitrage of exchange rate and interest rate differentials. Once the capital account opened, the bank saw more corporates looking at how to invoice in RMB and centralize liquidity management. “MNCs are seeing it as not as difficult as they thought,” says Ling.