From rags to reserve: China's RMB

When the IMF said late last month it would review to consider adding China's RMB into its Special Drawing Rights basket it became pretty clear we have reached another inflexion point in China's currency story.

From what we are now seeing, China's rapid ascension as a global economic powerhouse will soon be matched by a global currency of equal stature.

" ANZ expects the RMB will soon challenge the US dollar and Euro as a global reserve currency within the next 20 years."

In ANZ's new report The RMB Takes Centre Stage we predict the RMB is now likely to become a top-three currency in the short to medium term (behind the US dollar and the Euro).

The development of the renminbi (RMB) is already a truly remarkable story. While its use in offshore markets was nascent only five years ago, recent steps by China's leaders have seen the RMB quickly develop into a major trade currency.

As a trade currency, RMB settlements already accounts for more than 25 per cent of China's total trade volume. This is expected to reach over 30 per cent this year and then over 50 per cent in the coming years as it becomes more widely used for invoicing and settlement.

Initiatives such as Free Trade Zones, the emergence of RMB clearing centres, and simplifying the repatriation of RMB funds offshore means the RMB is now the second most used currency in global trade finance (excluding open accounts) after the US dollar.

In ANZ's report Caged Tiger: The transformation of the Asian Financial System, we predicted China's financial system could be more than twice as big as the US by 2030, accounting for around half of Asia's financial assets by mid-century.

The RMB is likely to dominate this landscape, not only because of the size of the Chinese economy but also because it stands to be a regional funding currency. While offshore RMB bond markets in Hong Kong and Taiwan have grown exponentially, we expect they will soon be dwarfed by China's own onshore debt market.

The awakening power of Chinese investment was also recently seen in record trading volumes on the Hong Kong Stock Exchange, driven by onshore investors using Hong Kong – Shanghai Stock Connect, another new initiative facilitating cross border share trades.

Given this success, ANZ expects the RMB will soon rival the US dollar and Euro as a global reserve currency within the next 20 years, providing considerable commercial benefits for those trading directly with China.

This is notably the case for Australian companies. China is Australia's largest trading partner, its largest export market and its largest source of fee-paying students and tourists. It is also one of its largest sources of foreign direct investment.

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The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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