A ‘yuan bloc’ is emerging in East Asia, as nations in the region track the renminbi as the main reference currency. This is expected to triple China’s cross-border trade to $1.03 trillion over the next three years

In its latest research report, The Peterson Institute for International Economics( PIIE) has said that China has moved closer to its long-term goal for the renminbi to become a global reserve currency.

Since the global financial crisis, the report said, more and more nations, especially emerging economies, see the yuan as the main reference currency when setting their exchange rate.

And now seven out of 10 economies in the region — including South Korea, Indonesia, Malaysia, Singapore and Thailand — track the renminbi more closely than they do the dollar. Only three economies in the group — Hong Kong, Vietnam, and Mongolia — still have currencies following the dollar more closely than the renminbi, said the report, posted on the institute’s website.

The South Korean won, for example, has appreciated in sync with the renminbi against the dollar since mid-2010.

China has long vowed to raise its currency’s global sway, along with the rise of its economy, which became the world’s second-biggest last year.

The goal has seen significant development in recent years as the country promotes renminbi-denominated cross-border trade and gradually loosens control over its capital accounts.

As a result, Hong Kong has quickly risen to be the world’s biggest offshore renminbi trading centre, with about 600 billion yuan ($95 billion) in deposits.

According to the latest report by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) renminbi-denominated trade accounted for 10 per cent of China’s total foreign trade in July. The figure was zero just two years ago.

From July 1 to Aug 31, global payments in the renminbi rose 15.6 per cent, according to SWIFT, as payments in other currencies fell 0.9 percent on average.

The renminbi had a market share of 0.53 per cent in August and has overtaken the Danish krone to become the 14th-highest global payment currency, the member-owned cooperative said.

Cross-border trade settled in renminbi will triple to 6.5 trillion yuan ($1.03 trillion) within three years as relations with the world’s second-largest economy grow, Royal Bank of Scotland Group PLC was quoted as saying by Bloomberg on Oct 9.

Settlements will grow 12 to 20 per cent this year, reaching $1.03 trillion in two years, up from $330.8 billion in 2011, said Janet Ming, head of the China desk for RBS in Europe, Middle East and Africa.

“We’re seeing a lot more customers starting to deal in renminbi,” Ming was quoted as saying by Bloomberg.

“For most companies and banks, China and India is where the growth is. If you’re dealing with China, ignoring renminbi is not the right thing to do.”

Wang Jianhui, chief economist with Southwest Securities Co Ltd, agreed. “Investors are looking for new reserve currencies at a time when both the dollar and the euro are under pressure. This is a good opportunity for the yuan,” he said.

The Royal Bank of Scotland predicted in a recent that renminbi will become a fully convertible currency in 2015.The PIIE said that renminbi could rise to the status of an international currency in 10 to 15 years if the country can reform its financial market and allow greater access for foreigners via capital account liberalisation.

Forming the new renminbi bloc is the result of China’s rise as the main trading partner in the region. China’s share in East Asian countries’ manufacturing trade has risen from two per cent in 1991 to about 22 per cent this year, according to the PIIE report.

In fact, trade is also propelling the rise of the renminbi outside East Asia.

The currencies of India, Chile, Israel, South Africa and Turkey all now follow the renminbi closely, in some cases, more so than the dollar.

The renminbi would be more attractive if the country could further liberalise its financial and currency markets, the report said.

Some fear that China might follow Japan’s rise and fall over the past decades, but the institute thinks otherwise.

“They should take note that even during the heady days of the Japanese miracle, the yen never came close to rivaling the dollar as a reference currency. There was never anything close to a yen bloc in East Asia,” the report said.—Courtesy: Editor, China Daily web