Is the internationalisation of the Chinese domestic currency, the Renminbi yuan, running out of steam? The question is prompted by the most recent report on the topic by SWIFT (the Society for Worldwide Interbank Financial Telecommunication).
It shows at the very least a sudden sharp reversal of the process. In October 2017, according to SWIFT's measurements, the Chinese currency (RMB) dropped one position to seventh in the currency rankings for customer initiated and institutional international payments by value, with a share of 1.46%. The RMB began 2016 in fifth place, according to SWIFT data.
SWIFT says the month’s decrease is likely due to seasonal effects following the Golden Week holiday in China in October. Overall, RMB payments value decreased by 19.10% compared to September 2017. In general, all payments currencies increased by 3.02%.
Greenback still most popular
The US dollar is still the world's most popular currency, accounting for 39.47% of international payments, followed by the euro at 33.98%. Britain's pound sterling sits comfortably in third place with 7.71%.
The Chinese culture is noted for its focus on the long term rather than a western-style obsession with the short term. The Middle Kingdom will place no great emphasis on the recent data.
The Chinese authorities will argue that with the gradual formation of a market-oriented mechanism for RMB exchange rates, internationalisation is playing a more important role in indirectly facilitating China’s economic globalisation.
RMB product suites have become more diverse in the past five years. In addition to offshore RMB foreign exchanges, bonds, equities and derivatives, mutual market connectivity between offshore and onshore capital markets have also been introduced.
Such diversification allows more international investors to access the Chinese market and accelerates the alignment of the mainland’s capital account with the international capital market.
It is almost impossible to discuss the prospects for RMB internationalisation without also discussing China's hugely ambitious Belt and Road initiative (BRI) to boost China's presence and soft power beyond its borders.
Belt and Road
As international investors gradually adopt RMB as a major international currency, trade and investment along Belt and Road countries will promote a greater use of RMB in financing and risk management solutions that are developing in the more integrated China capital market.
If the internationalisation of RMB is a long-term journey, its inclusion in the International Monetary Fund's special drawing rights basket is a key step in that journey.
At the most recently concluded SDR review in November 2015, the IMF Executive Board decided that the Chinese renminbi (RMB) met the existing criteria for SDR basket inclusion.
In the IMF SDR basket
It has therefore since 1 October 2016 been part of that basket, along with the US dollar, the euro, the Japanese yen, and the pound sterling. With a weight of 10.92% it is the third most important currency behind the dollar and euro.
The IMF says the next review of the method of valuation of the SDR will take place by September 30, 2021, unless an earlier review is warranted by developments in the interim.
The current criteria for inclusion were adopted by the IMF Board in 2000. They establish that the SDR basket comprises the currencies that are issued by members or monetary unions whose exports had the largest value over a five-year period, and have been determined by the IMF to be "freely usable".
The IMF goes on to explain that “freely usable” in this context is defined in its Articles of Agreement (Article XXX(f)) to mean a currency that the IMF determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.
The concept of a freely usable currency concerns the actual international use of and trading in currencies. A crucial point is that it is different from whether a currency is either freely floating or fully convertible, neither of which could yet be claimed for the RMB.
The People's Republic of China is a law unto itself in institutional financial matters as in most other matters. It can ignore the laws of international finance in a way that few other countries can.
Its tendency to manipulate its exchange rate to suit its own purposes is one of the reasons why opinion can be so divided on the future prospects of full internationalisation.
Believers versus unbelievers
Believers point out that the volume of trade settled in Renminbi in around 2010 was effectively zero; ignoring the trend demonstrated by the SWIFT monthly figures for the moment, any advance from that can be portrayed as a positive development.
Unbelievers, by contrast, simply do not trust the Chinese authorities or Chinese companies with questionable governance processes to behave in anything other than a self-serving pro-China manner.
An inescapable conclusion is that while the RMB's trajectory is towards wider acceptance and broader use, if full internationalisation ever happens, it will take place on China's terms and no one else's. And it will take place at a pace of the PRC's own choosing.
The Renminbi might for now have become a fixture in the SDR basket, but a vast amount of work remains to be done for it to become a true major reserve currency.