IS RMB APPROACHING SAFE HAVEN STATUS?

WHILE the wider global community chatters excitedly about the internationalisation of the Chinese yuan, the conversation among central bankers is about its role as a reserve currency. Indeed, central banks in those Asian countries which have strong trade and economic links with China already include the Renminbi in their portfolio of reserve currencies.

Listening to discussions during a recent high-level conference, it is clear that, while it is not quite an international currency, the RMB is already a regional currency.

And for this reason, fluctuations in the Chinese yuan increasingly affect the exchange rate of Asian currencies — and influence the policies of their central banks.

Chinese Premier Li Keqiang has foreshadowed partial opening of China’s capital account to allow the RMB to trade in an even wider band. The Chinese are also expected to liberalise interest rate movements.

These moves are widely anticipated — the question is when? 

Quietly, however, the yuan is taking its place alongside the US dollar, the Euro and the yen — as a reserve currency.

A couple of central bankers from the US, along with currency strategists from leading global banks, executives from the Bank of International Settlements (BIS), and top academics whose research focus is on the Chinese currency, gathered in Hong Kong in May to swap notes on the growing influence of the RMB.

The most optimistic of speakers at the conference, which was hosted by the Economics and Finance Faculty of City University, believes the US will cease to be the world’s only reserve currency in the not-too-distant future.

Instead, in what is described as a multi-polar world, this speaker believes that the RMB, the US$ and the Euro will make up 90 per cent of the world’s reserve currencies, leaving the remaining 10 per cent to be shared among smaller currencies, including the yen and the Swiss franc.

“We see plenty of evidence of central banks wanting to include the Renminbi in their basket of reserve currencies,” said a senior executive of the Basel-based BIS, which represents central bankers.

The Bank of Thailand, for example, is one central bank already including the RMB in its reserve basket. This explains why the Thai baht has been moving with the appreciating yuan against the US dollar and the Euro.

For countries with big trade accounts with China, the experts agree that it makes sense to put a lower weight on the dollar — and more on the RMB.

Economists from the ASEAN+3 Research Office (AMRO), located in Singapore, says the Chinese currency is now a “reference currency” for the 14 economies of East Asia. (ASEAN+3 is a grouping including the 10 members of the Association of Southeast Asian Nations plus South Korea, Japan and China. AMRO, an emerging Asian monetary fund, was created to provide surveillance of the financial system of member nations.)

The Amro research finds that the increase in the weight of the RMB in regional currency baskets can be traced to the widening of the band in which the RMB has been able to trade against the US dollar since July 2005.

It finds that while it remains the anchor currency in this region, the US dollar has “seemingly lost its dominating status”. This is a result of closer trade and financial linkages with China, which is also increasing investment in Asian countries. 

RMB cross-border trade settlements reached 2.94 trillion (US$467 billion), and accounted for 8.4 per cent of total Chinese trade settlements, in 2012.

Despite the fact that China is a big net international creditor, however, the RMB is not yet seen as a safe haven currency like the Japanese yen or the Swiss franc.

“Safe haven” is defined as an asset that maintains its value or even increases its value when global wealth declines. 

During the recent global crises, the Chinese themselves bought US-denominated assets, seeing them as safe haven assets. The Chinese currency tends to depreciate in times of stockmarket turmoil.

While it may not yet have achieved the status of a safe haven currency, experts say this does not preclude the renminbi from playing a role as a significant reserve currency. Its attraction to risk-averse investors and official reserve managers (with central banks) is
increasing.

Conference participants stressed the need to manage the transition of the RMB as it replaces the US dollar in its share of reserve currency basket, to avoid serious disruptions to the global financial system.

They say it is crucial that the phenomenon does not lead to a dumping of the US dollar, which would cause market chaos. Global
organisations, such as the International Monetary Fund and the Group of 20 nations, will have a key role in ensuring a smooth transition. 

* Florence Chong is Editor of ATI Magazine