The case of internationalization of a currency RMB going global The case of internationalization of a currency

Currency Use vs. Trade volume

The Yuan Goes Global Exhibit 1 The Gradual Revaluation of the RMB (1994–2010) Peg to dollar One currency rate Managed float

The case of RMB: analysis Gradually appreciating Huge reserves Biggest financier of government bonds Growing confidence in world market Second largest economy, (though not in per capita terms) Problem area: Lack of convertibility Capital control

Development: External RMB market established to promote the use of RMB 2004 establishing ‘Offshore RMB Market’ in Hong Kong, more and more trade handled in RMB (RQFII* and RQFLP* scheme) Market size grows steadily, rules lessened. Used as settlement currency at cross border trade Currency swaps with other economies: EU. UK, Astralia, Turkey, etc. This Allows other countries to finance their importers with RMB to be used at trade settlement Chile, Tanzania, and Nigeria diversified their reserves into RMB holding. *Renminbi Qualified Foreign Institutional Investor scheme (RQFII) **Renminbi Qualified Foreign Limited Partner Program (RQFLP), In terms of its capital account, China has been rolling out reforms since the 18th Party Congress. These include expanding the Renminbi Qualified Foreign Institutional Investor scheme (RQFII) which allows qualified investors to channel offshore yuan into bonds and mainland stock, or the Renminbi Qualified Foreign Limited Partner Program (RQFLP), which allow offshore yuan to be invested in private equity. It also allowed more renminbi-based IPOs in Hong Kong.

Criterion of an International currency Used in international transactions freely and commonly Stable in value Credible monetary policy Credit worthiness US$ (60% held outside US), Euro€ (14% held outside EU as of 2010), £, yen,

Necessary conditions for an international currency a) the size of the economy and the trade sector, b) the size of the financial market, c) capital account openness, and d) the stability of the economic and political conditions. These attributes are necessary, but not sufficient conditions for an international currency SDR, special drawing right: In the latest November 2010 review, the IMF Executive Board determined that the basket comprises four currencies; namely, the U.S. dollar, euro, pound sterling, and Japanese yen and their weights are, respectively, 41.9, 37.4, 11.3, and 9.4.

The yuan is currently traded in specific markets in specific ways Exhibit 2 Evolution of Trading in the Chinese Renminbi The CNH market or offshore pool of deliverable RMB in Hong Kong officially came into existence in July 2010 when Hong Kong banks were allowed to settle RMB trades with one other. This has led to a surge in CNH market liquidity, with $603 billion in RMB deposits at the end of December 2012, according to Hong Kong Monetary Authority (HKMA) figures. now the daily turnover for CNH spot is currently around $2.8 billion. The daily volume for CNH forwards is estimated at $3.2 billion with total CNH liquidity topping $6 billion. CNY-NDF market not important anymore since 2010 due to CNH market development

The yuan is inevitably headed towards a major global role Exhibit 3 Necessary Medium for the Growth of the RMB A no brainer?

Using Hong Kong as an experimental ground: ’Dim Sum’ bonds the so-called “Dim Sum” bonds – bonds denominated in RMB and issued in Hong Kong - in 2007. 24 issues up to 2011. altogether 60 billion RMB denominated debt certificate in total.

Exhibit 4 A Score Board of International Currency Status The yuan is rapidly developing along the criteria for an international currency status Exhibit 4 A Score Board of International Currency Status

The Yuan Goes Global: Case Questions How does the Chinese government limit the use of the Chinese currency, the RMB, on the global currency markets? What are the differences between the RMB, the CNY, the CNH, and the CNY-NDF? Why was the McDonald’s bond issue so significant? Will – if ever – the RMB become a truly global currency?

Case questions: answer How does the Chinese government limit the use of the Chinese currency, the RMB, on the global currency markets? The Central bank of China is under the guidance of the Polit bureau All trading inside china between the RMB and foreign currencies, is conducted according to Chinese regulations. License needed. On shore and off shore market not freely connected. This is not historically all that unusual. Many countries, industrialized and emerging, have used a variety of similar initiatives and policies to constrain the growth of their home currency as a traded currency of significance outside their domestic market.

Case questions: answer What are the differences between the RMB, the CNY, the CNH, and the CNY-NDF? CNY. This is the trading of the Yuan or RMB in the onshore market. This is a highly regulated market CNH. This is trading of the RMB in the Hong Kong market – “offshore”. This market, however, is showing signs of increasing regulatory release contributing to rapidly increasing currency exchange volumes. CNY-NDF. NDF: Non deliverable forward contracts. These are forward contracts, traded in the Hong Kong offshore market. The non-deliverable forwards are not important as of now, due to the rule changes that RMB settlement is allowed as of 2010.

Non deliverable vs. total forward contracts as of 2013

3. Why was the McDonald’s bond issue so significant? The McDonald's bond was the first issue denominated in RMB by a non-financial non-Chinese firm in the global market at the Dim Sum Bond Market Although small in size, roughly $30 million, the issue has significant signaling effect: for companies to both operate and fund their business growth in Chinese RMB. The McDonald’s issuance was followed in November 2010 by a larger $150 million RMB-bond by Caterpillar Corporation (US), and in January 2011 by a CNY 500 million ($75.9 million) issuance by the World Bank. labeled Panda Bonds

4. Will the RMB become a truly global currency? The primary impediment to the RMB’s growth as a global currency are the capital market restrictions, on shore off shore differences, and residents and non residents treatment. The Chinese government has made it very clear that it has no ambition to become an international currency, particularly as a reserve currency. Etc.

The purpose of using RMB denomination differs across countries The use of RMB in trade is limited to small portion of the total trade with China. Countries who accepted RMB as payment intend to use RMB to hedge their RMB exposure. Not for ‘store of value’ (reserve currency) purposes per se.