Waiting and Waiting for the Global Renminbi

20 Mar 2019‘Great powers’, says the Nobel-laureate economist Robert Mundell, ‘have great currencies’. So where is China’s?

In the years following the Great Financial Crisis things seemed to be looking up for the renminbi. By the middle of 2015, almost 30 percent of China’s trade was being settled in renminbi; Hong Kong banks were holding some RMB 1 trillion worth of yuan-denominated deposits; and there was life in the Dim Sum bond market, with issuance running close to $10 billion per month. 2015 was also the year the International Monetary Fund (IMF) announced that the renminbi would become one of currencies that underpin its own reserve asset, the Special Drawing Rights or SDR. Almost by definition, this step seemed to confer on the renminbi something like the status of a global reserve currency. So the renminbi seemed, to most observers, to be firmly on a path towards real international relevance.

In the past three years, though, grounds for optimism about the renminbi’s global role have proved to be decidedly fragile. These days, the share of China’s trade that is settled in renminbi is less than half of what it was in 2015; the stock of yuan-denominated deposits has fallen to just over RMB 600 billion; and Dim Sum bond issuance late last year was down to $1 billion per month.

It turns out that all the enthusiasm back then about the renminbi’s future was guilty of what philosophers call a ‘category-mistake’. What most people saw as evidence of the renminbi’s internationalization was, in fact, simply evidence of something else: an accumulation of speculative positions built on the expectation that renminbi was going to rise in value. As the renminbi weakened after mid-2015, so too did the market’s willingness to own it and use it.

That’s hardly the mark of a global reserve currency. International investors want to own dollars or euros, for example, not just because they expect these currencies to strengthen, but because they offer legal security, ease of use and, critically, unrestricted convertibility into any other currency. And it is questions surrounding the renminbi’s full convertibility that are likely to stunt its growth as a global currency for the foreseeable future. It just happens to be a fact of life about the current international monetary system that the definition of a reserve currency implies a fully convertible one. The problem is that recent years have seen the Chinese government pivot away from the idea that the renminbi should be a fully convertible currency.

Back in 2012, the ‘political report’ delivered at the Eighteenth Party Congress included a goal to “gradually realize capital account convertibility”. By 2017, though, officials had decided to drop any reference to capital account opening in the report to the Nineteenth Party Congress. This change of heart was captured neatly in 2015 by the then-People’s Bank of China Governor Zhou Xiaochuan, who claimed that “the capital account convertibility that China is seeking to achieve is not based on the traditional concept of being fully or freely convertible”. Instead, he said, China would adopt a concept of “managed convertibility”.