Over the last decade, the Chinese currency has transformed from an area of specialist interest into a mainstream part of the global financial system. It is a development that is consistent with the rapid growth of the Chinese economy, and is a long-term trend that will continue for years to come.
A currency is often considered international according to three factors. Is it used in global trade? Is it a vehicle for international investment? And do central banks hold it as a reserve currency? Today, the renminbi exhibits a growing maturity in each of these areas.
As a trade and payments currency, the renminbi is now the world’s fifth most active currency by value1 , a notable rise from late 2010 when it ranked just 35th 2. Further, in terms of global foreign exchange, the total average daily turnover of renminbi traded reached USD285 billion in 2019, up from USD34 billion in 20103.
Both these trends are on an inexorable upward trajectory, establishing the renminbi as an increasingly important trade settlement currency, offering cost efficiencies for companies trading with China.
Within the investment landscape, important developments have enabled access to China’s onshore financial markets, where the local stock markets are second only in size to the US, with a combined value of USD13 trillion in May 20214. The bond market is also considerable in size – the value of all Chinese corporate debt is USD9.4 trillion, compared to USD9.7 trillion in the US. The total outstanding in China’s bond market is USD17.4 trillion5.
The result is that global investors are buying more RMB-denominated assets than ever before. In recent years, access has become more straightforward via the Stock and Bond Connect programmes, while the inclusion of Chinese securities into major global indices has enabled global institutions to gain exposure to the country. Other channels also continue to evolve. In May 2020, investment quotas were scrapped on the Qualified Foreign Institutional Investor (QFII) scheme, further easing access to the onshore market.
The renminbi’s status as a reserve currency is also clearly on the rise. Ever since the renminbi was added to the basket of currencies that make up the Special Drawing Rights (SDR) in 2016, central banks have significantly increased their holdings: from USD90 billion in 2016 to USD267 billion at the end of 2020, accounting for 2.3 per cent of global allocated reserves6.
Future growth drivers
A series of growth drivers should drive further demand and keep the momentum strong for the Chinese currency.
The most recent trade-related development is the signing of the Regional Comprehensive Economic Partnership (RCEP). This will deepen China’s trade ties across Asia, especially with Southeast Asia. Trade among RCEP countries was nearly USD2.5 trillion, which is equivalent to 13 per cent of global trade7.
The ongoing Belt and Road Initiative (BRI) also means that Chinese capital will further enhance trade flows between participating countries, while local suppliers will use the renminbi to buy from Chinese companies. In the period from 2013 to 2020, trade of goods between China and BRI countries totalled USD9.2 trillion8.
Significant changes in market infrastructure and investor behaviour is also promoting cross-border use of the renminbi. For international investors, the upcoming inclusion of Chinese government bonds into the FTSE World Government Bond Index (WGBI) is anticipated to lead to estimated further flows into China worth up to USD150 billion9 .
Inflows will only be half of the story, as Chinese investors will also have greater access to offshore investment opportunities. For institutions, this will be via a southbound route to Bond Connect, while retail investors in the Greater Bay Area will be able to participate in Wealth Management Connect – a new scheme that will allow them to buy offshore investment products in Hong Kong.
Understanding the benefits
China is the top trading partner for many Asian countries. As the country strengthens its trade relations with other Asian countries, more regional trade will be conducted without having to go through a third currency. For companies importing from China, accepting renminbi invoices reduces the currency risk for the exporter, which in turn can lead to more favourable pricing for the importer.
Today, the range of hedging instruments enable risk management options for the renminbi which are increasingly similar to those available for other currencies. In financial markets, futures will add liquidity to markets and help manage exposure to two-way volatility, while helping maintain an orderly market with a stable currency.
From an investment perspective, global investors increasingly appreciate the role that renminbi-denominated assets now play in diversified global growth portfolios. And for central banks, the ability to diversify reserves into a new major currency is one way to mitigate risk.
HSBC – the preferred bank for renminbi services
HSBC is the largest international bank in China. It was the first bank to have established renminbi capabilities in six continents and provides one of the largest international renminbi networks in the world, covering more than 50 markets. With the currency integrated into every part of its business, the bank is particularly well placed to advise clients on renminbi including foreign exchange, hedging, cash management, and trade finance, as well as a full range of investment banking and securities services.
Asiamoney’s Global RMB Poll of customers recently recorded HSBC as being the No. 1 provider of renminbi products and services for the 10th consecutive year. This customer recognition of HSBC’s strength in this area also demonstrates that the bank has been actively involved in promoting the use of the renminbi with customers in international markets for many years.
Over the coming years there will be further developments in the internationalisation of the renminbi and HSBC looks forward to realising new and exciting benefits for its international customers.
2 Swift, RMB Tracker, November 2011
3 Bank for International Settlements, Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets
4 World Federation of Exchanges
5 S&P Global Ratings, China Bond Market – The Last Great Frontier
6 IMF, Currency Composition of Official Foreign Exchange Reserves
7 UNCTAD, Key Statistics and Trends in Trade Policy 2020
8 People’s Daily Online, Belt and Road Cooperation a Path of Hope for Countries
9 HSBC Global Asset Management, China Insights, Oct 2020
This material does not constitute Investment Research. It has not been prepared by HSBC’s Research Department. This material represents the best estimates or approximation as at the time of compilation and is not a recommendation. Investors must make their own determination and investment decisions.