"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

China’s renminbi set to become the newest global currency

The renminbi has truly arrived on the global stage, presenting opportunities as well as risks.

China’s renminbi (RMB) is set to become the newest global currency. According to a report, “Generation ¥ – RMB: the new global currency”, prepared by the Economist Intelligence Unit (EIU) for the global law firm, Allen & Overy, almost two-thirds (62%) of companies in Asia-Pacific, Europe and the U.S. with exposure to China’s renminbi expect transaction volumes to more than double in the next five years.

More than 50% of multinational companies currently use the RMB for payments outside greater China, including Singapore (74%); South Korea (59%); the euro zone (58%); the UK (57%); and North America (54%) – highlighting the extent to which the RMB is already being used for international trade outside of its home market.

For instance, the RMB is now the second most used currency for Volkswagen and Daimler in Germany and Ford and General Motors in the U.S.

To put the RMB’s growing importance in perspective, the RMB catapulted to the fifth most popular global payment currency by value (behind only the dollar, euro, pound and yen) in January this year – having been in 20th place just four years ago. Last year alone saw global RMB payments grow in value by 102%.

The report states that the internationalization and convertibility of the RMB has already had a considerable impact on companies’ China strategies with 85% saying it has led to more investment for mainland expansion plans (because of lower funding costs) and has also led to restructuring of global (71%) and regional (68%) supplier / vendor networks.

The RMB could also get a further boost as an international currency should the International Monetary Fund decide to include the RMB in its “virtual currency” basket known as Special Drawing Rights (SDR)1 in October. Should this happen, central banks around the world will automatically recognize the RMB as a reserve currency, accelerating their investment in the RMB and the currency’s global status.

Jane Jiang, China regulatory partner at Allen & Overy in a company press release said: “Rapid growth in the RMB’s use is being matched by rapid change in the currency’s regulatory framework. To meet this challenge, many multinationals exposed to the RMB will have to think differently about their treasury function. Many of the old restrictions and constraints on which companies based their renminbi-related decisions and strategies are fading away. China’s RMB regime is likely to be a source of new possibilities for those companies who not only keep abreast of the changes and adjust their own policies in response but also dare to ask for changes by proactively communicating with more listening regulators.”

However, the regulatory changes have not all been plain sailing, with multinationals identifying delays in the rollout of the China International Payments System and operational constraints in the guise of a lack of overall RMB liquidity, as major concerns.

Liquidity is also a major concern when assessing the risks associated with issuing both dim sum (international) and panda (domestic) bonds with multinationals citing insufficient liquidity in the secondary market as the risk that concerns them most.

Further liberalization of the renminbi could possibly see companies relocating regional treasury operations to China and devolve more power to decision makers in the mainland, according to 64% of the multinationals surveyed.

When it comes to RMB liquidity management outside Hong Kong, nearly as many respondents put the Shanghai Free-Trade Zone (78%) and Singapore (77%) in their top three locations of choice over the next five years. Luxembourg came next according to 52%, beating London by quite some margin at 33%.

Jane Jiang added: “The growth in use of RMB is not just a China success story. There is fierce competition among global financial centres to become the market of choice for RMB transactions. This underlines the need for a better understanding of how best to use the currency, not just in China but across a multinational’s network.”

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