Long road ahead for globalization of renminbi

(Ecns.cn) -- China's currency the renminbi (RMB) has been making much bigger waves in the world in recent years, but to play a more international role in trade it still must go through a long process, China Economic Weekly reports.

In July, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) said in its monthly RMB Tracker report that offshore payments in RMB surged in value by 17.4 times during the previous 20 months, a rate of growth that outpaced all other currencies.

According to SWIFT, the RMB now represents the 16th most actively used currency in trade settlement, rising from the 35th most in October 2010.

Meanwhile, the latest statistics show that the Chinese central bank's foreign exchange reserves shrank by US$65 billion in the second quarter, standing at US$3.24 trillion at the end of June.

This has raised concerns that shrinking forex reserves will be spent in years to come and unable to provide economic insurance for long, said the Financial Times.

If the central bank continues along this path, fears over the devaluation of the RMB will linger in the market, which will affect the trade role of the currency, pointed out China Economic Weekly.

The rapid growth of the RMB in trade settlement should not be boasted, because the currency's global role is still weak, ranking behind the South African rand, said an insider from the Bank of China.

Apart from payment values, the influence of a currency can also be reflected in its market share in global transactions, said Zhang Guangping, deputy chief of the China Banking Regulatory Commission's Shanghai bureau.

In 2007, the RMB ranked 20th in terms of market share in global transactions. In 2010, it dropped to 21st place. In 2011, it climbed to 20th again before reaching 19th in the first half of 2012.

Putting the growth of payment values aside, the RMB's global influence is still far from becoming one of the dominant currencies such as the US dollar or UK pound.

In the last six decades, the United States has earned an average $35 billion every year by extending seigniorage beyond its borders because of its globally dominant currency.

This is among the reasons why the Chinese government hopes to push forward the internationalization of the RMB, said Xu Shanda, former deputy director of the State Administration of Taxation.

If the RMB transforms from a trading currency into an investment currency, and then into a reserve currency, it will bring many benefits to China's economy, added Xu.

Since July 2009, the State Council has approved Shanghai and parts of Guangdong to pilot RMB settlement of cross-border trade.

An insider told China Economic Weekly that the central government has several strategies, including the gradual appreciation of the RMB, cross-border trade settlement in RMB and offshore RMB markets.

But the influence of a global currency is especially reflected in its advantage of being frequently used between other countries, not only between other countries and itself.

As a result, the Chinese government has gradually and selectively eased restrictions on both the inflow and outflow of financial capital, permitting some banks to offer offshore RMB deposit accounts.

China now accounts for 10 percent of the world's gross domestic product (GDP) and 9 percent of world trade. It is estimated to have accounted for about one quarter of the world's GDP growth in 2011, but its currency's global influence does not match its economic size.