Another (small) leap forward for the yuan

One Yuan Renminbi. Picture from Flicker user upton

By Suvi Dogra, Research and Liaison Officer, Geo-economics and Strategy Programme

China’s yuan renminbi took another small step towards becoming a staple global currency earlier this week, when the directors of the Asian Development Bank decided to include the RMB and the Indian rupee in its programme for providing trade finance. The ADB has agreed to support deals denominated in these local currencies under its Trade Finance Programme (TFP), primarily to support growing intra-regional trade.

The US dollar has been in short supply in many countries, and TFP head Steven Beck suggested the move would encourage the use of regional currencies in trade, reducing reliance on the dollar as a settlement currency. ‘It advances our promotion of trade in the region, which is crucial for boosting job creation and economic growth,’ he said.

The ADB is not alone in its decision. Last week Australian Treasury secretary Wayne Swan announced that Australia was ready to seek direct conversion of the Australian dollar and the Chinese RMB to promote bilateral trade. Swan said Australia backed China’s efforts to internationalise its currency and ‘make it a more freely convertible staple of the global financial system’.

Earlier this year, Iran decided to accept RMB and rupee in payment for oil exports to China and India respectively.

With Asia emerging as an engine of global growth, intra-regional trade has assumed a greater role in the region. According to the ADB, intra-regional trade in Asia in the next ten years is estimated to account for at least half of all foreign trade for Asian countries. While at present, 90% of all foreign trade in Asia is settled in US dollars, this percentage is expected to decline.

Dollar trade has benefited not only from the crisis in the eurozone but also from a stagnating Japan. These developments have created the space for a second reserve currency. The RMB may well be equipped to fill in the vacuum given the robustness of the Chinese economy, which replaced Japan as the second largest economy in 2011. This may well set the tone for a new monetary regime for a multipolar world as suggested by former World Bank President Robert Zoellick (who speaks at the IISS next week).

For many years, China’s global integration was limited to trade. However, this is fast spilling into the financial sector. Cross-border use of the RMB has been increasing as Beijing has taken concerted steps to encourage its use across the globe. To make the RMB more flexible, China’s central bank loosened its tight grip on the currency in mid-April by announcing that it would widen the RMB’s trading band against the dollar from 0.5% to 1%. Further, at the start of June China began direct trade of the RMB with the Japanese yen. There has even been talk of direct rupee–renminbi trade to reduce transaction time.

This recent thrust in the internationalisation of the renminbi fits the vision of the Chinese monetary authorities, who would like to reduce the exchange-rate risks to which Chinese companies are exposed. The RMB’s emergence as a reserve currency can also reduce transaction costs in trade as well as improve the funding efficiency of China’s financial institutions.

Recent developments have been important, but for the RMB to truly acquire the status of a global reserve currency Beijing will need to do more than convince other countries to conduct trade and finance transactions in it. China will also need to introduce capital account convertibility and have a more transparent exchange-rate policy.

The third IISS Geo-economics and Strategy conference, ‘Currencies of power and the power of currencies,’ will be held in Bahrain from 30 September to 2 October. Participation is by invitation only. Please contact IISS-middleeast@iiss.org or +973 1718 1155 for more details.


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