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Friday, September 9, 2016, 10:00

RMB’s unstoppable climb to the global stage

By Duan Ting in Hong Kong
RMB’s unstoppable climb to the global stage
Mainland economy’s opening-up, new stock connect help lift the yuan. (Photo provided to China Daily)

The much-anticipated Shenzhen-Hong Kong Stock Connect was approved by regulators on Aug 16 — taking the internationalization of the renminbi (RMB) another step forward ahead of the International Monetary Fund’s (IMF) inclusion of RMB next month to calculate the value of Special Drawing Rights (SDRs) that were created in 1969 as a supplement to the existing reserves of member economies.

Despite the Chinese mainland currency’s sharp depreciation since Aug 11 last year, experts are upbeat about its internationalization in the long term, and believe that Hong Kong will remain the most important offshore RMB center.

According to global financial messaging services provider SWIFT’s (Society for Worldwide Interbank Financial Telecommunication) August 2016 RMB Tracker, the RMB rose to the No 5 spot in July this year as a world payments currency by value after having dropped to sixth position the previous month. Despite a recent slowdown, renminbi internationalization is continuing on most accounts, such as payments, bank adoption and offshore clearing center growth.

RMB’s unstoppable climb to the global stage
Market share of top 10 world payments currencies in July 2016. Source: Society for Worldwide Interbank Financial Telecommunication (SWIFT) (Photo provided to China Daily)

Catching up in cross-border payment

The Chinese currency continues to be the second most-used currency for cross-border payments  with the mainland and Hong Kong, with a weight of 12.7 percent. The US dollar continues to be the leading currency for cross-border payments with the mainland and Hong Kong, with a share of 63.6 percent.

Fielding Chen Shiyuan, an economist at Bloomberg Intelligence, explained that, in the past few years, RMB internationalization has mainly been promoted by the People’s Bank of China (PBOC). The yuan’s appreciation and relatively high interest rates have lured overseas investors to hold on to the currency. On the other hand, the relatively low offshore RMB interest rates have improved the dynamic development of dim sum bonds and offshore RMB loans, as well as derivative products.

However, Chen said the two-way fluctuation and the PBOC’s cutting of interest rates, which reduces the advantages of the currency, will slow down the pace of RMB internationalization.

According to Cheng Shi, head of research at ICBC International Research, the gradual opening-up of the Chinese economy and financial markets offers strong support for RMB internationalization in the long term. Especially after Britain’s decision to quit the European Union, the global economic pattern has been changing, making the US and mainland economies stand out and lifting the importance of the yuan. Hong Kong’s offshore RMB center status has become even more critical after Brexit.

Since September 2015, three new clearing centers have been selected by the PBOC — Zambia, Argentina and Switzerland — making a total of 19 RMB clearing centers spread across the globe.

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