The volume of China’s current-account transactions settled in renminbi peaked in March but has stagnated since then. Their share, having surged from 1.7% in July 2010 to 13.7% in June 2011, stood at 10.3% in June 2012.
Dariusz Kowalczyk, strategist at Crédit Agricole, says the renminbi has still made strides in its share of global payments and trade financing, as well as holdings by foreign portfolio investors. "However, its bread-and-butter use by Chinese domestic and foreign trading partners has declined despite the growth of offshore centres such as London, and China’s push to establish more, including in Singapore and Taiwan," he says.
That setback reflects the changing outlook for the renminbi, with foreign exporters more willing to receive payments in an appreciating currency characterized by low volatility, which is what the renminbi used to be.
There is a strong correlation between expectations of the renminbi’s performance and the share of China’s trade denominated in the unit. Until the third quarter of 2011, foreign investors had been pricing in annual appreciation of about 2% in the non-deliverable forwards market, and acceptance of the renminbi in trade payments had been rising.
The renminbi’s share in China’s current-account flows stabilized when appreciation expectations in the NDF market began to ease and fell when the outlook changed to expectations of depreciation as disappointment rose with the performance of China’s economy. The HSBC China manufacturing purchasing managers’ index, for example, indicated a 10th successive fall in August, and stood at its weakest level since March 2009. Moreover, the shift has come as the Chinese authorities have continued to reiterate that a depreciating currency would be favourable for exporters.
Kowalczyk believes progress on renminbi internationalization will be slower until the currency rebounds.
"While a clear recovery in the NDF market might have to wait for convincing signs of China’s growth rebound, once this happens, internationalization might become easier again," he says. "And once the economy re-accelerates, expectations of renminbi appreciation should return, boosting its acceptance abroad."
