RMB Internationalization: Implications for Exchange Rate

Stepping into 2015, Renminbi has made several concrete achievements toward the realization of internationalization. According to SWIFT, RMB has become the fifth most frequently used currency in the global market in terms of its share in international payments. It is also noteworthy that the total value of payments transacted in RMB has boomed by 102% within 2014, whereas other currencies only grew on average by 4.4%. Meanwhile, the International Monetary Fund (IMF) will discuss the inclusion of RMB into the SDR basket in November, when the selected group of currencies is re-evaluated every five years. On 21st January, the PBoC has agreed with SNB to establish yuan clearing and the RQFII (RMB Qualified Foreign Institutional Investors) pilot region in Switzerland. 

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In fact, these progress were just in line with RMB's increasing popularity in global trade and retail business, while there remain much potential to explore in RMB-related financial assets. According to Joseph E. Gagnon and Kent Troutman, arbitrage exists between CNH (offshore RMB) and CNY through trade settlement, "the full internationalization of the RMB, and elimination of the CNH–CNY premium and CNH–CNY interest rate differentials requires greater capital account liberalization by China". To further remove these barriers to yuan transaction, the PBoC needs to keep RMB exchange rate in a relatively stable and strong position so as to implement prospectives reforms in the financial market and avoid market-wide risk.

We saw RMB depreciates drastically towards USD in the past two days, which forms the weak expectation on future RMB rate as shown on RMB one-year NDF.  In the long run, however, there is limited space for yuan's further depreciation. Although cheaper yuan stimulates export, to a greater extent China suffers from capital outflow. The PBoC has practiced reverse repo this week to keep stable flow of liquidity, and more discretionary guidance in the currency market are possible after the Federal Reserve announced its interest rate decision. In general, there would not be radical reflation for RMB to stimulate growth in 2015 even if the Fed practices interest rate increase. Instead,  yuan will seek a rebalanced rate with dollars in a gradual manner so as to promote its long term goal of becoming an internationalized reserve currency.

This entry was posted on Wednesday, 28 January 2015 and is filed under ,,,,,. You can follow any responses to this entry through the RSS 2.0. You can leave a response.

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