Sunday, April 7, 2013

Can renminbi rival the US dollar?

No doubt, the Chinese renminbi has strengthened more than 3% vis-à-vis the greenback this year, bringing its total gains over the past six years to 30%. But it still has a long way to go before it actually starts to rival dollar in its use as an international currency.

There has been much negative news recently surrounding the US. From a downgrade of the US government debt by rating agency Standard & Poor’s (S&P, on August 5, 2011, had lowered its rating of US sovereign debt one notch to AA+ from AAA, stripping Uncle Sam of the highest rating for the first time in 70 years) to a large public debt that stands at a whopping $14.618 trillion (about 103% of US GDP, and more than $1,30,000 per US tax payer), Washington seems to have had it all. But, as if this was not enough, some observers have now started questioning how long the US dollar can sustain its status as a major international currency. And adding to the sense of gloom surrounding the greenback, the trade weighted-average value of the dollar, as measured by the Federal Reserve’s Major Currency index, continues to plumb new lows (see chart).

Meanwhile, China’s currency, the renminbi (RMB) or yuan (as it’s better known), continues to rise. While the currency gained 0.9% against the dollar in August in the face of significant global financial market volatility, the 12-month RMB futures, as per experts, imply a 1.5% appreciation over the coming year. In fact, RMB has strengthened more than 3% vis-à-vis the greenback this year, bringing its total gains over the past six years to 30%. Even, the issuance of so-called dim sum bonds, which are yuan-denominated bonds issued in Hong Kong, has jumped sharply this year. From just RMB12 billion ($1.7 billion) in 2008, the issuance of dim sum bonds has already surpassed RMB108 billion ($17 billion) so far in 2011. In fact, if a recent research by Standard Chartered is to be believed, the total pool of dim sum bonds could well hit the $1 trillion mark by 2015. Does that mean the dollar’s days are numbered and renminbi is well on its way to replace it as a global currency?

Historically, Chinese trade transactions were invoiced in currencies other than the renminbi. It was only in 2009 when the Chinese government started allowing exports and imports to be invoiced in yuan. Although less than 1% of Chinese trade transactions were invoiced in yuan in Q1 2010, invoicing in yuan has started moving north in recent quarters. In fact, in Q2 2011, trade transactions worth about RMB600 billion, representing about 10% of total Chinese exports and imports during the quarter, were invoiced in yuan.

Still, the use of the renminbi as a means of payment and as a unit of account remains limited on a global scale. For instance, every three years, the Bank for International Settlements (BIS) conducts a survey on the size and composition of the foreign exchange market and in its most recent survey, conducted between April 2010 and June 2010, BIS found that the renminbi constituted just 0.9% of all the foreign exchange transactions that occurred during that period (up from 0.1% in 2004). On the other hand, the dollar was involved in 85% of all foreign exchange transactions between April & June 2010.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
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