Building new investment opportunities with China’s Renminbi
reserves are equivalent to a full year of global gold production. In other words, size will limit the extent to which international reserves can be parked in gold.
Work to be done China is on track to become the world’s largest economy and historical parallels imply a role for the RMB as an important reserve currency at some point in the future. But there is much work still to be done for the RMB to achieve reserve currency status. China needs to open up the capital account for international transactions and make the RMB fully convertible for such transactions and it needs to make its bond markets more liquid.
Like most of China’s economic policy, changes in the approach to the currency have for the most part been unfolding gradually. The current foreign exchange UHJLPH QRZ KDV JUHDWHU ÁH[LELOLW\ DQG WKH DXWKRULWLHV appear to be a little more prepared to allow the currency to appreciate than in the past. Recently, on the regulatory front change seems to have gathered pace. China has set up currency swaps with many other countries including in Latin America and Asia and RMB bond issuance in Hong Kong (so-called ¶'LP 6XP· ERQGV LV JURZLQJ DV D ÀUVW VWHS WRZDUGV
42 Currency Investor | Autumn 2011
creating a deep investable bond market for the Redback. Projects for RMB settlement have been in place for sometime. In 2009 RMB trade settlement schemes began in a number of mainland cities and Hong Kong participating banks were allowed to SURYLGH WUDGH ÀQDQFH WR IRUHLJQ WUDGHUV VHWWOLQJ trades in RMB.
As such changes proceed they will have the immediate advantage of reducing foreign exchange risk for Chinese companies that switch to RMB settlement. Last year there was a global roll-out of RMB trade settlement and an offshore RMB products platform was launched in Hong Kong.
The RMB interbank market was also opened to selected offshore RMB holders and an RMB Overseas Direct Investment trial launched. In the coming years we expect WR VHH D VLJQLÀFDQW LQFUHDVH LQ global RMB trade settlement and increasing liquidity in the off- shore RMB bond market as Dim Sum bond issuance increases.
PHILIP POOLE -
is Global Head of Macro and Investment Strategy at HSBC Global Asset Management
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