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Chatham House | International Economics
“China, the largest nation in the world, remains both an enigma and a potential factor in world stability”
2
Chatham House | International Economics
Outline
• Why the renminbi?
• A trading nation without an international currency
• Building a market for the renminbi
• ‘Managed convertibility’
• The age of Chinese money?
3
Chatham House | International Economics
A trading nation without an international currency
• Restricted circulation outside China
• Rising, but still limited use in international trade
• An ‘immature creditor’
• The dollar trap
“Great nations have great currencies”
4
Chatham House | International Economics
Building a market for the renminbi
• How to create an international currency
• Two-track strategy:
- RMB-trade settlement scheme
- offshore market
• Constraints on capital account convertibility
• Beyond the offshore market
5
Chatham House | International Economics
USD
EURGBP
RMB
0
10
20
30
40
50
60
70
80
90
0 5 10 15 20 25 30 35 40 45 50
Val
ue
as %
of T
rad
e
Value as % of Payments
The RMB is 2nd most used currency in trade settlement
Source: SWIFT, 2015
GBP
JPY
RMB
CAD
SGD
CHF
HKD
AUD
THB
ZAR
INR0
1
2
3
4
5
6
7
8
9
10
0 2 4 6 8 10
See inset above
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Chatham House | International Economics
Overview of the RMB offshore market
8
Source: Federal Reserve Bank of San Francisco, 2015, Chatham House
Over 35 bilateral currency swap agreements, including with the ECB12 Offshore RMB centres plus Hong Kong
Toronto
LondonLuxembourg
Frankfurt
Paris Seoul
TaipeiHong Kong
Macau
Sydney
Singapore
Bangkok
Doha
Chatham House | International Economics
864
317
225
131.8 122.1679.4
5020 1
0
100
200
300
400
500
600
700
800
900
1000
Hong Kong(Jan-16)
Taipei(Jan-16)
Singapore(Jan-16)
Macau(Apr-14)
Seoul (Aug-14)
LuxembourgSep-14)
London(Jan-16)
Paris(Jul-14)
Frankfurt(Mar-14)
Tot
al C
ust
omer
dep
osit
s (R
MB
bn
)Major financial centres in the RMB offshore market
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Asian RMB offshore centres/hubs
European RMB offshore centres/hubs
Source: Chatham House
Global stock of offshore RMB liquidity in different financial centres
Chatham House | International Economics
London: RMB trade and trade finance
10
• The UK is one of China’s most important trading partners in Europe.
• Total trade between the UK and China reached USD 83 billion 2014, ranked the second after Germany and accounted for 14% of total goods trade between China and the EU.
• The value of RMB trade finance business in London reached a high of about RMB 43 billion in 2013.
Source: Bourse Consult - City of London, 2015
0
5000
10000
15000
20000
25000
30000
2011 H1 2011 H2 2012 H1 2012 H2 2013 H1 2013 H2 2014 H1 2014 H2
Tra
de
fin
ance
in
Lon
don
(RM
B b
n)• Project finance may
be the next area of growth; In 2014, CIC estimated China could invest £105bn in UK infrastructure projects by 2025
Chatham House | International Economics
The way forward: ‘managed convertibility’
• China is not ready for financial opening up
• reforming the banking and financial system will take long time
• ‘Managed convertibility’ is, and will continue to be the default mode
• a system of quotas – R-QFI etc
• free trade zones
• direct channels to China’s stock exchanges
11
Chatham House | International Economics
The age of Chinese money
• A regional or an international currency?
• The renminbi and the dollar
• The renminbi and the international monetary system
12