Three renminbi developments from the past week confirm that the Chinese currency is headed down a slow but certain path to become one of the world’s reserve currencies. The first bit of news is widely reported, the other two are lesser known but point to the growing internationalization of the renminbi.
- Last weekend the Chinese government declared that it will widen the trading band within which it keeps the renminbi confined. Every trading day the People’s Bank of China (the central bank) sets the “parity rate” for one unit of its currency (yuan) against the US dollar. Before Saturday’s change it allowed investors to push the value of the yuan by as much as .5%, up or down, from that rate. Now the PBoC will double this band, and tolerate movements of as much as 1% in either direction. According to the Wall Street Journal’s read of market expectations, this is considered a larger change than what many had expected.
- On Tuesday the central bank of South Korea announced that it will start to shift a modest amount of its foreign reserves to renminbi. The Bank of Korea has approval from China to invest up to $300 million in bonds and equities denominated in renminbi. (South Korea has $316 billion in foreign reserves.) This makes sense considering the trade links between the two countries (see below chart) and is also driven by South Korea’s view of the renminbi’s growing status.
Here’s what Heung Sik Choo, head of the Bank of Korea’s reserve management, had to say in RBS Reserve Management Trends, as reported by Risk.net:
The Bank of Korea has noted the changing place of China’s currency in the world economy, and is adjusting its long-term reserve management strategy accordingly. “The renminbi has the potential to become one of the major reserve currencies in the long term. I am not sure how long this long term is: 5, 10, maybe 20 years,” says Choo.
- The London Metal Exchange, the world’s largest market for options and futures in the metals used for industry, is considering a new role for the renminbi. It has asked the traders who use the exchange whether it should drop sterling from the list of currencies in which trades can be cleared and settled and add renminbi, instead. (The LME always lists its prices in USD, but allows trades to be settled in yen, euro and — for the moment, at least — pounds sterling.)
Mind you,r But investors with a longer time horizon (sovereign wealth funds, pension funds, insurers) as well as anyone charged with planning the financial infrastructure of tomorrow (exchanges, regulators) should remember that the renminbi is steadily moving beyond Chinese borders.