Many interested in the financial sector are watching intently as financial muscle seems to be passing from the West to the East with the resurg-ence of China. Indeed it is a matter of the sun rising in the East and hoping it will not set on the West.
What about the economic situation in China? We hear about exports slowing, debt issues, political control etc. Where are we really? Are we missing out on something? What about the renminbi – or RMB – the Chinese currency?
China is one of the largest countries in the world by land area and its 1.35 billion people represent nearly one fifth of the world’s population. Thus, human resources must certainly not be a problem. Today China has become one of the world’s fastest-growing modern economies.
Over the long term the renminbi has been classified as a regional currency, a managed currency and not open to inter-national trading. In recent years as China developed economically and opened its doors to inter-national trade, the RMB has taken on a more international stance, and open market forces are coming more and more into play.
Since January 2010 the RMB appreciated against the reserve currency of the world, the dollar, from 6.83 to the present 6.22, or nine per cent up. There was much pressure, especially from the US, for China to relax its protective policy on the RMB and allow market forces to take charge.
The People’s Bank of China (PBOC) or Central Bank seems to have shifted to a more market-driven monetary policy since 2012, and in 2013 the RMB was still under mild appreciation pressure. But is the RMB ready for internationalisation?
The answer depends on what the markets are saying, and here we should look to international trade settlements completed in RMB. From July 2010 the global corporates have increasingly been settling more of their business with China in RMB, which is now used to settle almost 18 per cent of China’s total world trade, up from only three per cent in 2010.
Not many appreciate that China, as recently reported, has just overtaken the US as the world’s largest trader in goods.
The US and China share approximately 14 per cent of the market share of the world trade, with Europe as the world leader with about nine per cent, according to BNP Paribas.
However, the dollar is definitely the world’s top payments currency with 38.75 per cent of currency trades (the euro holds 33.51 per cent). The RMB has overtaken the Swiss franc in this regard, although it is still a long way from the leading currencies. Some catching up must be done here. It could take time, but the writing is on the wall.
The RMB bond market was established in 2007 and additional corporate issuance of RMB bonds from leading internalised companies started in 2010. Now, not only Hong Kong is participating but the UK, France, Switzerland and Singapore are all in it as well.
I believe it will not be long before the RMB will penetrate the euro bond market too. Already offshore RMB mutual funds are being set up. Some financial institutions are targeting a 4.5 per cent annual yield, with about 1.5 per cent thrown in as currency appreciation against the dollar for a short duration of only three years. The RMB is considered an appreciating currency with limited downside, remaining relatively stable even in the 2008/2009 financial crisis.
Since 2005 the RMB has appreciated by about 1.7 per cent per annum against the euro and 3.1 per cent per annum against the dollar. In fact China is considered to have strong economic fundamentals, large foreign exchange reserves and an undervalued currency. What else?
Certainly the sun seems to be rising in the East for the world’s currency markets.
info@curmiandpartners.com
This article is the objective and independent opinion of the author.
The information contained in the article is based on public information.
Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
Neville Curmi is a director at Curmi & Partners Ltd.