The use of the renminbi in trade finance will increase significantly over the next three to five years, according to a new report from Aite. While the currency faces plenty of headwinds, Aite says there is enough support to help it grow, particularly availability and use of RMB-denominated assets.
“The size of China’s economy and its role as a leading power in imports and exports should mean that the renminbi will gain significant traction in the universe of trade invoicing and settlement,” Aite said in its report. This “will later be followed by its use for global payments, especially for cross-border Asian transactions, and, in the longer term, by its use as an offshore investment currency.”
In the near-term, however, it faces many obstacles, among them “the lack of deep and liquid domestic financial markets, a tight financial market and capital account, and limited exchange-rate flexibility,” Aite said. This will stifle the RMB’s prospects as an investment and reserve currency.
One banker at a global financial institution that deals with companies using the RMB agrees. China is making great strides when it comes to loosening up restrictions, he says, but “China still ranks high on basically all components of regulations and currency controls. I see it changing but not so fundamentally that [the RMB] will be a global reserve currency like the euro or dollar, with ease of use and convertibility.”
Still, many large corporates are active in china, this banker acknowledges, and many have or could have massive flow in the RMB currency. With that the case, it could usher in wider use of the currency. “A broadening of the range of renminbi-denominated assets will foster growth of the onshore capital markets and the currency’s prospects globally. The development of renminbi-denominated products such as equities, mutual funds, money market funds, and insurance products is vital for the renminbi’s prospects as an investment currency.” According to an Aite survey, by the end of 2014, total RMB issuance for the year will be RMB554 billion, up from RMB375 billion in 2013; and a majority of respondents thought that dim sum bonds are “appealing.”
“Despite domestic regulatory restrictions continuing to hamper the renminbi’s investment currency prospects overall, the renminbi’s use in trade finance will increase significantly over the next three to five years,” says Virginie O’Shea, senior analyst in institutional securities and investments at Aite.