RMB internationalisation has received a lot of attention, perhaps even 'hype' at times, but in many ways this topic is more about the internationalisation of a country rather than its currency.
"If [China's liberalisation] is not managed in a carefully sequenced way, there could be significant domestic and global consequences."
Daniel Everett, Global Head of RMB, Strategy and Execution | ANZ
One of my favourite quotes from a recent forum was from a speaker who said reform in China and RMB internationalisation presents a situation which “…is astonishingly frightening but at the same time an astonishing opportunity".
He was right.
ANZ attended the third Australia-Hong Kong Renminbi Trade and Investment Dialogue in July. The forum, run by the Hong Kong Monetary Authority, Australian Treasury and the Reserve Bank of Australia, brought together over 160 representatives from the industry to debate key themes around opportunities associated with the RMB's internationalisation.
In addition, we recently brought together over 100 clients at our inaugural FT-ANZ RMB Growth Series conferences in Hong Kong and Sydney following the release of our RMB report “The Renminbi Takes Centre Stage".
The RMB Growth Series events covered a broad range of topics and I found myself madly scribbling down notes to absorb the wealth of new information. Many themes from the Australia-Hong Kong Renminbi Trade and Investment Dialogue emerged in our conferences as well.
THE LIBERALISATION DILEMMA
So why is RMB internationalisation astonishingly frightening but at the same time an astonishing opportunity?
Despite the enormity of the opportunity China's economic size presents in an open market, our speaker reminded us it is normal for a closed financial market, once opened, to suffer a crisis (for example, the US in the 1920s and Japan when it internationalised the yen).
It is clear China faces a challenge, both economic and political. We are seeing that playing out at the moment with equity markets.
Capital account liberalisation is vital for increased global integration and use of the RMB. However, if it is not managed in a carefully sequenced way, there could be significant domestic and global consequences.
Our Sydney panel noted China is wary of developed market models which have broken down on many occasions and continue to do so. The US issues which came to a head in 2008 and the continuing European dramas are prime examples. Why, therefore, should they listen to the rest of the world?
Opening capital flows too fast would bring financial instability while going too slow reduces China's ascension, and that of the RMB, to its targeted place among the dominant financial markets and currencies of the world.
This would be counter to China's desire to internationalise the RMB, ensure greater influence in global capital markets and be less reliant on USD.
Either way, integrating a financial market of this size into the rest of the world is a colossal event.
RMB AS A TRADE FINANCE CURRENCY
Our Hong Kong panellists believed trade continues to be a critical focus in terms of generating offshore flows. While the statistics show almost 25 per cent of China's cross border trade is currently RMB denominated, from a zero base in 2009, the underlying 'true RMB trade' (once arbitrage and re-invoicing out of centres like Hong Kong are excluded) would look much lower.
There is therefore an enormous opportunity still present with China's largest trading partners to increase adoption of RMB in their trade transactions.