In a Sibos exclusive, Trade Finance Global (TFG) spoke to Xiong Yuanmeng, director of Cross-border RMB & Foreign Exchange team, Global Transaction Banking Department of Bank of China HQ (BOCHQ).
China’s centrality in trade, along with favourable interest rate policies, has made their currency more attractive.
China’s currency is exhibiting the enthusiasm typically associated with the Year of the DragonChina’s currency – the renminbi (RMB) – is finding new appeal among emerging market traders and global investors seeking alternative settlement options.
In July 2024, China’s use of the renminbi in cross-border transactions reached a record high of 53%. In light of this milestone, TFG spoke to BOC’s Xiong Yuanmeng to learn more about the renminbi’s burgeoning internationalisation.
The new centre of gravity for trade
According to BOC’s historical documents, China began to implement renminbi pricing and settlement in Hong Kong and Macao in 1968, creating a precedent for the use of renminbi in international trade. In September 2008, China made a series of strategic arrangements to promote cross-border trade renminbi settlement. In July 2009, China officially kicked off the pilot program in renminbi. “In the very beginning”, Xiong summarised, “we didn’t even call it renminbi internationalisation. We called it ‘pilot use of renminbi in cross-border trade’.”
The picture now is unrecognisable from a decade ago. China is now the main trading partner of over 150 countries. The dominance in trade volumes, cementing China’s position as a globalised powerhouse, has naturally given the activation energy to renminbi internationalisation. With these international tendrils, Xiong observed, “In some scenarios, and for some countries and regions, the renminbi may be an alternative choice.”
This alternative is becoming increasingly attractive to emerging markets, particularly in the current monetary environment. For decades, the dollar has dominated as the global currency in trade finance: as of August 2024, 49.07% of global payments were made in the dollar, far ahead of 21.58% in the euro in second.
However, US interest rates have been a topic of contention over the past year. The Federal Reserve’s decision last month to cut interest rates by half a percentage point, rather than a typical quarter, has generally paid off – but with the election looming, no moves in the US market are without uncertainty.
The extended period of high US interest rates has created funding challenges for developing economies. As a result, China’s lower interest rate policy, aimed at stimulating economic growth, has made renminbi funding more appealing.
Xiong emphasised that interest rate differentials are just one factor in the currency’s growing adoption. “In the short term, the gap between dollar funding cost and renminbi funding cost will impact the demand for renminbi funding,” he said. “But in the long term, it still depends on the natural progress for a currency to be recognised and more accepted in the international trade or investment market.”
The shift is reflected in corporate treasury operations. Multinational companies, both Chinese firms expanding globally and foreign enterprises operating in China, are increasingly incorporating renminbi into their cash management strategies. Using the renminbi rather than the dollar, considering the divergence in Chinese and US rates is up to 150 to 250 basis points, according to traders and corporate advisers.
As such, foreign companies with operations in China are far more willing now to accept renminbi revenue at their local headquarters, leading to the establishment of RMB cash management pools.
Hong Kong, with its sobriquet as the Gateway to China, is crucial in the renminbi’s flow. Not only does it have the deepest renminbi liquidity pool outside of mainland China, of over RMB 1 trillion, according to SWIFT, more than 70 percent of global offshore renminbi payments are processed in Hong Kong.
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