Being bullish about the renminbi was easy once. In 2010, when HSBC published the first in its Rise of the Redback series of reports, China’s currency was a tiny fish in the global, multi-trillion dollar foreign exchange pool. It accounted for less than 1 per cent of global trading on any given day, and did not even make the list of the top 30 currencies used to make payments.
Predicting growth in the currency’s use was not difficult seven years ago. Now, the renminbi’s daily use in currency trading is four times those levels and it is a top 10 payment currency. Just as importantly, London, the biggest centre for currency dealing, also hosts more trading than Hong Kong — a first stop on the road to global usage.
However, over the past six months the idea that the renminbi is on an inevitable path to greater internationalisation has at least been muddied. China’s move in November to tighten capital controls has sharply reduced global use of the currency, with one measure of the renminbi’s progress sinking to a three-year low.
That is the backdrop for the latest in HSBC’s Redback series, which maintains its staunch belief in the currency’s ongoing internationalisation, describing 2017 as “a year of fresh momentum”. The reports are published roughly once a year, and optimism from the Asia-centric bank is only to be expected. Despite the obstacles China itself has thrown in the way of internationalisation, there are enough reasons to conclude that the past six months are a pause rather than a retreat. The most recent actions by Beijing support that, as officials ease their tight grip.
It is certainly easy to see how the impression of a retreat might have arisen. The controls were a response to the renminbi suffering a series of falls taking it to eight year-lows, which in turn attracted more bets that its slide could snowball. After two episodes — in August 2015 and January 2016 — when renminbi weakness spooked global markets, China’s draconian response in November crushed the risk of a repeat.
In January, officials turned their focus to the currency market itself. Although China never confirms any intervention, traders believe the People’s Bank of China was behind a sharp and surprising jump in the renminbi’s value offshore which made it stronger than its onshore cousin. Since August 2015, the offshore rate had typically been weaker, reflecting international bets that the renminbi would continue to slide, and encouraging mainlanders to move funds overseas.
The fallout from China’s moves were clear by February, when Standard Chartered’s renminbi globalisation index sank to a three-year low and clocked its worst monthly drop of just over 6 per cent. And Hong Kong data show deposits in the city have halved since their Rmb1tn ($145bn) 2014 peak.
HSBC’s latest Redback report acknowledges the setbacks. The proportion of China’s outwards direct investment and the level of its trade that it settles in renminbi have both halved in less than a year. However, the bank’s analyst is largely pinning his hopes on the currency’s increased use for China’s $900bn One Belt, One Road infrastructure initiative, a long-term plan for funding projects along trade corridors to Europe.
“Internationalisation is expected to benefit from the rising tide of Belt and Road-related business flows, as financial integration is an important part of the strategy,” said Qu Hongbin, HSBC’s chief economist for Greater China, who pointed to the trade settlement and credit opportunities from supporting projects in as many as 65 countries.
There are also more immediate signs that renminbi controls are loosening once more. Last month the PBoC quietly dropped a one-out-one-in renminbi policy in which every unit being transferred out of the mainland had to be matched precisely with inflows. And in the past week, the two renminbi rates, offshore and onshore, have been allowed to trade more freely, creating periods where the offshore rate is once more the weaker of the pair.
And herein lies the challenge of being optimistic about the renminbi’s internationalisation: not only does it involve weighing up horizon-gazing projects such as Belt and Road, but it also requires keeping an eye on the daily market minutiae. But then the path to internationalisation has never been a straight one. Reading back through HSBC’s Redback series and noting how some of the more ambitious forecasts have not yet come to pass is sign enough of that.