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Could the RMB replace the Dollar and Euro?

23 May 2012

 On 31 May, the EU-Asia Centre jointly held a Panel debate in cooperation with the Belgium-Hong Kong Society and the Madariaga—College of Europe Foundation about the growing internationalisation of the renminbi (RMB) and its potential to displace the dollar and the euro as a primary international exchange currency. Panellists welcomed the gradual internationalisation of the RMB but thought it would take some time to achieve full convertibility, and even longer to displace the dollar or euro.

Piet Steel, Vice-President EU-Asia Centre and Chairman of the Belgium-Hong Kong Society, said that the rise of any great power depends on its economic and financial strength. For more than half a century the world’s top currency has been the dollar, a reflection of America’s economic power. In the past decade the introduction of the euro has challenged the dollar’s pre-eminence and accounts for about a third of global foreign currency reserves. But the recent financial crisis that hit the US and then Europe has cast doubt on the future of the dollar and especially the euro. China’s spectacular economic rise has led to speculation that the RMB could displace both the dollar and euro at some point.

Shahin Vallee (Senior Advisor to Bruegel and Banque Paribas) said that if China was going to be the largest economy in the world by 2030 or 2040 then it was natural that it should have a currency to match. Rather than seeing the RMB as a competition with existing reserve currencies, it should be viewed with two purposes - first, to establish the RMB as a regional currency, and second to provide the international system with a currency to balance the dollar and the euro, but not in direct competition with them. The primary challenge to RMB internationalization was the degree to which China is ready to open its capital account. While we shouldn’t expect too much progress in this area, the increase of offshore RMB markets such as Hong Kong and London was accelerating internationalization and compensating for the capital account’s lack of openness. China knows that having a reserve currency means responsibilities (lender of last resort) and is well aware of what happened to the yen in the past. Would Asia now accept China taking the lead on currency matters? Vallee closed by discussing the necessity of strengthening China’s banking system and opening up its economy in order to be a successful monetary leader regionally and globally.

Paul Gooding (Managing Director, Head of European RMB Business Development, HSBC) said that his role demonstrated the growing importance of trading in the RMB in London with all its advantages (timezone, experience, legal and regulatory systems). There were over RMB 109 billion in deposits in London, about 20% of the deposits in Hong Kong. HSBC had recently issued a RMB 2 billion bond which was over-subscribed. The City of London Initiative, started last September, has seven banks seeking to promote London as an international RMB centre. HSBC was seeking to educate its clients in the merits of trading in RMB, eg lower costs. He posited that the internationalization process has three stages - trade currency, investment currency, and reserve currency. The RMB was currently in the second stage.

Dai Ying, Head of Marketing for the ICBC (Industrial and Commercial Bank of China) in Brussels discussed the challenges to the Chinese government of RMB internationalization. A key difficulty for China was the need for autonomy and control over monetary policy, which is challenged by a more open capital and currency flow. China was trying to gradually appreciate the RMB, while ensuring that appreciation was not too rapid compared to economic growth. There were a few historical opportunities for RMB regionalization and internationalization. First, the East Asia financial crisis when China signed an agreement with eight Southeast Asia countries for a bilateral currency agreement, and second the 2008 financial crisis, when China decided to expand the RMB for cross border settlement and to regulate capital investment. There were many advantages of the internationalization of the RMB, including the big consumer market and import and export needs that make the Chinese market an ideal investment target. Many Chinese financial institutions were now becoming more open and beginning to expand their global network, which was accelerating the RMB’s internationalization.

Raul De-Luzenberger, Head of Sector of DG Ecofin, considered that the RMB will likely take the path of trade led development, and that the strength of the Chinese economy will lead the RMB internationalization. The internationalization of the RMB will also have many benefits and will provide opportunities for the financial markets as it becomes easier to trade with and invest in China. While the RMB could potentially challenge the role of the euro and the dollar, this challenge was a long way off, and would depend quite heavily on conscious decisions of the Chinese authorities to make the RMB a reserve currency. The euro had become a significant reserve currency but had not displaced the dollar. There was still much to be done in China regarding reform of the banking system.

In the discussion panellists debated whether the RMB was under-valued. A majority thought it was not under-valued – and most considered that it should be subject to market forces.

There was scepticism about the RMB being the anchor for a currency union in East Asia, although the RMB was increasingly used to settle trade between China, Japan and Korea.

Asked about China’s role in the IMF, panellists considered that China should have a stronger voice in the Fund but it was still not clear what policy changes China would seek, if any.

Panellists also agreed on the close relationship between internal reforms in China and the further easing of capital controls. It would be some years before we saw full convertibility.

In his closing remarks, Pierre Defraigne, President Madariaga Foundation, said it was natural that the RMB should play a bigger role in global finance, and even one day possibly displace the euro and dollar. But China was very cautious and would only move gradually taking account of its national interests. In moving to full convertibility, one loses control of trade and industrial policy. For the near future we were likely to see a polycentric monetary system all with deep flaws, eg dollar being used to finance geopolitical ambitions, euro in trouble due to lack of structural reforms. There were thus costs and risks associated with the convertibility of the RMB. There could be a lengthy transition period involving an increased role for SDRs (with the RMB). Another possibility was a drift to ‘continentalism.’

In closing the meeting Piet Steel said it was inevitable that China’s economic clout would result in increased financial muscle. Perhaps instead of complaints about an undervalued RMB we would hear complaints about the dominance of the renminbi in the future.







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