Renminbi era dawns as China influence grows

“The Chinese currency, the renminbi, is not terribly well known at the moment, but over my lifetime it’s going to become almost as familiar as the US dollar.” So said George Osborne during a recent visit to Shanghai. 

At first glance, this might seem unrealistic. The renminbi is hardly a global investment currency and barely registers on central bank balance sheets. So any change would require a profound shift in the financial landscape. 

Yet the renminbi is evolving at a remarkable pace. As a medium of exchange and unit of account, it is on course to acquire international status in three years; in 10, it may unseat the dollar as the world’s reserve currency. 

The renminbi’s growing stature is visible on many fronts. The first is trade. History shows the currencies of countries that play an important role in the global economy have developed into leading characters on the world stage. And with China now the globe’s biggest trading nation, the renminbi has momentum in its favour. It is already the world’s ninth most-traded currency and recently replaced the euro as the second most heavily-used currency in international trade finance. 

The conditions are, therefore, ripe for the renminbi to become a significant trading currency over the next three years. By then it should account for about 5 per cent of global trade, a fivefold increase on the 2012 figure. 

Its transformation into a global investment currency is also progressing rapidly. Here, the catalysts are financial reform and capital market expansion. Under plans recently unveiled by President Xi Jinping, China aims to extend the yield curve for government bonds and create a capital market that serves the needs of a broad range of borrowers and investors, domestic and foreign. This development, alongside a prospective widening of the renminbi’s trading band, should boost the currency’s credentials as an international investment vehicle.