Back in October 2015, as then prime minister David Cameron welcomed President Xi Jinping to the UK, China’s central bank issued one-year bills in London’s offshore renminbi debt market. The move was viewed as cementing London’s status as the centre of renminbi business outside greater China. Two years earlier George Osborne, then Britain’s chancellor of the exchequer, had said that the Chinese currency would “become almost as familiar as the dollar” within his lifetime.
The International Monetary Fund would later add the renminbi to its reserve-currency club, the Special Drawing Right basket, describing it as a “milestone in the integration of the Chinese economy into the global financial system”.
But even before the IMF’s decision took effect in October, there were signs that SDR recognition might turn out to be the high water mark of the renminbi’s internationalisation rather than the dawn of a new, more diversified global monetary system.
Across a range of indicators, the extent of its global push has slowed and in many cases slipped into reverse.
The share of China’s foreign trade settled in its own currency has shrunk from 26 per cent to 16 per cent over the past year while renminbi deposits in Hong Kong — the currency’s largest offshore centre — are down 30 per cent from a 2014 peak of Rmb1tn. Foreign ownership of Chinese domestic financial assets peaked at Rmb4.6tn in May 2015; it now stands at just Rmb3.3tn. In terms of turnover on global foreign exchange markets, the renminbi is only the world’s eighth most-traded currency — squeezed between the Swiss franc and Swedish krona — barely changed from ninth position in 2013.
What appeared to be structural drivers supporting greater international use of the Chinese currency now appear more like opportunism and speculation. Between the renminbi’s de-pegging from the US dollar in July 2005 and its all-time high of 6.04 versus the dollar in January 2014, the renminbi gained 37 per cent as it followed a nearly uninterrupted path of appreciation.
An expectation that this would continue drew hundreds of billions of dollars in foreign capital into China, often exploiting loopholes in regulations designed to discourage speculative inflows, as investors hoped to profit from risk-free currency gains.
But the tide has turned. The renminbi hit an eight-year low versus the dollar late last month and is on track for its worst one-year fall on record. Investors are offloading renminbi assets and exploiting those same loopholes to move funds in the opposite direction.
1. July 2005 – 8.2765 – China ends strict Rmb peg to US$