You can call it the yuan or the renminbi—they are used interchangeably—but whatever you call it, you’d better get ready for the world’s fastest-growing currency. An oddity outside China’s borders less than a decade ago, the renminbi (which translates as “the People’s currency”) is quickly becoming one of the world’s most commonly used forms of payment.
Last year, reports SWIFT, the worldwide bank-owned payment system, the renminbi moved from 20th spot in the rankings of the world’s most-used currencies to 14th in August, ahead of the Danish kroner but behind the Russian ruble. The No. 1 position is held by the euro, with the U.S. dollar at No. 2. Canada’s loonie ranks sixth.
By November, the renminbi (RMB) had slipped to 16th spot. But that was more a reflection of the crisis in Europe slowing demand for Chinese exports than a crisis in the currency. Indeed, the internationalization of the RMB is proceeding as planned by the Chinese government.
Beginning in earnest around four years ago, Beijing engineered a series of liberalization moves to allow the renminbi to catch up to the economic status of its homeland, now the world’s second-largest economy. For example, most of the restrictions on cross-border buying and selling goods in RMB have now been lifted. Renminbi investing options have also opened up. Foreign banks now offer an array of RMB products and services; you can open an RMB account in Canada today.
The deregulation in 2010 of the yuan in Hong Kong turned the city into a RMB investment hub, a position for which London, Singapore and other financial centres are now vying. But with a miniscule RMB bond market and plenty of investment quotas and restrictions, the RMB is still far from free-trading.
As long as the reforms keep coming, and China’s economy keeps humming along at its current pace, could the RMB soon crack the world’s top currencies? Sacha Tihanyi, Asian FX strategist for Scotiabank in Hong Kong, says he wouldn’t bet against it, although reaching the top five is “probably a five-year time frame.” Reaching the top 10 would mean doubling the RMB’s share of worldwide payments, from approximately 0.42% now, to about 0.9%. Getting into the top five would take quadruple the amount of payments currently made in RMB.
As for reaching the pinnacle—the renminbi as global reserve currency—that’s more of a long shot. It won’t happen until Beijing fully relinquishes control. “China would certainly have to take steps to allow a free-floating currency and a more open capital market, which I believe it will over the next 10 years, but perhaps not sooner,” says Blake Jespersen, managing director, foreign exchange sales, BMO Capital Markets.
Still, to put things in perspective, the U.S. dollar didn’t become a global reserve currency until after the Second World War, 150 years after it was created and three decades after the Federal Reserve was formed. That is, the greenback’s ascendancy trailed America’s rise to global economic dominance. If you mean to do business in China’s century, expect to do more of it in China’s coinage.