Renminbi as International Trade Currency

As China prepares to launch its renminbi (RMB) as international currency, a number of overseas institutions are reported to have bought up in excess of RMB 10 billion in tradable bonds on the country’s interbank bond market. Furthermore, it has been reported that Germany’s second largest bank, Commerzbank AG, has introduced the RMB for corporate customers to facilitate the trade between the two countries, making it easier for German businesses to make payments directly to China, and vice versa. So it would appear that, in general, the international community supports the move to internationalize the RMB.

However, it is not expected to be all smooth sailing, and analysts have expressed concern that in the short term, China’s strictly regulated exchange rate, structural current account surplus and capital account regime, will hamper efforts to generate outgoing RMB flow, as well as to manage the influx of the currency. The promotion of the RMB for international trade and investment would logically lead to full convertibility, facilitating changing the RMB into any other currency without restricting the amount or the purpose for which it will be used. Moreover, RMB reserve currency status will also put China into the position of having to establish an open capital account, as well as deeper and more competitive capital markets. Opening a capital account would require Chinese regulatory authorities to make the country’s exchange rate more flexible with the goal of retaining control over domestic interest rates. Taking into consideration that this would reduce the government’s hold on the economy, it is likely that convertibility for investment purposes may be pushed aside by political considerations.

Although full currency convertibility has been a goal for some time, since late 2008 efforts to promote the RMB as an international currency have increased, with the primary motivation believed to be reducing China’s dependence on the US dollar. Following the collapse of Lehman Brothers and the beginning of the global financial crisis of 2008, Chinese exports tumbled – partly because of a drop in demand, but also due to the fact the many importing countries experienced a credit freeze and limited access to trade financing. With the RMB becoming a trade settlement currency, economic upheaval in importing countries, will have less impact on China’s exports.