Philip Lowe: Renminbi internationalisation
Remarks by Mr Philip Lowe, Governor of the Reserve Bank of Australia, to the RMB Global Cities
Dialogue Dinner, Sydney, 27 April 2017.
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I would like to thank Laura Berger-Thomson, Eden Hatzvi, Chris Ryan and Callan Windsor for
assistance in the preparation of these remarks.
It is an honour for me to be able to speak at this Renminbi (RMB) Global Cities Dialogue. I would
like to congratulate the Department of Premier and Cabinet in New South Wales and the Sydney
for RMB Committee for putting this dialogue together. I would also like to offer a very warm
welcome to Sydney to those of you who have travelled from afar, especially those of you from
other offshore RMB centres.
We are all here to discuss the internationalisation of the Chinese currency.
This is an important topic. I say this for two reasons. The first is that the internationalisation of the
RMB and the associated liberalisation of the Chinese capital account have significant
implications for the global financial system. Indeed, it is likely that the internationalisation of the
RMB will be one of the biggest forces shaping the global financial system over the next decade or
so. The second reason is that as the RMB becomes a truly global currency it is likely to change
the way the Chinese economy operates. Australia's experience provides an example here. In our
own case, the internationalisation of the Australian dollar played an important role in shaping the
development of the Australian economy over the past three decades or so. The
internationalisation of our currency was a by-product of the move to a floating exchange rate and
the abolition of capital controls. For us, it has been a positive experience. My expectation is that
one day China too will be able to make the same claim.
It is easy to appreciate why the Chinese authorities have sought to have an internationalised
currency. As one of the world's largest economies - and one that continues to grow in relative
importance - it is understandable that China wishes to see the RMB take its place as one of the
world's truly global currencies. There are some clear advantages of being in this position.
Mainland China's financial markets will be deeper and more liquid, lowering the cost of finance to
business. And there's an advantage in being able to use your own currency in international trade
and have global prices quoted in your currency. Being a major reserve currency can also help
lower the cost of external financing. So China's ambition is readily understandable.
China is clearly making progress towards achieving this ambition. Given this, tonight I would like
to talk first about that progress and then about some of the challenges and opportunities that lie
ahead.
Progress
When we speak of an internationalised currency, what we typically have in mind is a currency
that is used frequently in international trade and investment transactions between residents and
non-residents and also in transactions that involve only non-residents.
An internationalised currency can't be achieved overnight. It takes time. It takes time for
nonresidents to be comfortable using another currency. They need to have the hedging instruments
available to manage risk effectively and a degree of familiarity with the foreign currency. It also
takes time for the home authorities to be comfortable allowing their currency to be freely bought
and sold by non-residents. So internationalisation is not something that occurs quickly.
For the RMB there has been more progress in the use of the currency in transactions between
residents and non-residents than there has been in its use for transactions between
nonresidents only. This is particularly so on the trade side, as the Chinese authorities have been
encouraging the use of the RMB for trade invoicing and settlement for quite some time.
The use of the RMB for trade transactions has been facilitated by the establishment of offshore
RMB centres, which provide a link between offshore markets and the mainland. As you are
aware, these centres are a unique feature of the RMB internationalisation process and are an
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obvious impetus for this dialogue. Importantly, market participants should have the confidence
to use the RMB freely within these centres, as many of these centres have RMB swap facilities
with the People's Bank of China (PBC). As such, they play a role in facilitating RMB transactions
between non-residents. That said, there has recently been a decline in some measures of
offshore RMB activity, which I will touch on in a moment.
Consistent with the experience of other currencies, the increased use of the RMB in trade
transactions has led to an increase in RMB-denominated financial transactions between
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mainland residents and non-residents. Most foreign financial institutions now have access to
China's bond markets, including, since last year, in the way previously available only to central
banks and sovereign wealth funds. Nevertheless, domestic bonds purchased by foreign
investors only account for around 1-11⁄2 per cent of the market, although the market itself has
expanded quickly. The authorities also intend to create a link between the bond markets in
mainland China and Hong Kong later this year. In addition, as of earlier this year foreign investors
are permitted to participate in the domestic foreign exchange derivative market to hedge the
currency risk they take on as part of their bond investments.
Foreign investors also have access to China's equity markets through programs such as the
Shanghai and Shenzhen Stock Connect schemes with Hong Kong. The stock connect schemes
have facilitated capital outflows from China, alongside other schemes allowing institutional
investors to invest offshore.
Reflecting the progress that has been made, last year the RMB entered the basket of currencies
that determine the value of the IMF's Special Drawing Right. This followed the IMF's decision in
late 2015 to designate the RMB as 'freely usable'. Not surprisingly, an increasing number of
countries, including Australia, invest a portion of their foreign reserves in RMB. I note, however,
that according to the IMF's latest figures, the total value of foreign reserves invested in Australian
dollars is still significantly higher than invested in RMB. I expect this to change over time.
Our local RMB market has also been developing, albeit from a low base. Recently published
survey data collected by the RBA show that the value of RMB deposits held with
Australianresident banks rose strongly over 2015 and has been broadly unchanged over the past year, at
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around RMB30-40 billion. Consistent with this, annual data from the Australian Bureau of
Statistics show that the share of Australia's trade with China invoiced in RMB has continued to
rise in recent years.
In contrast to the experience here in Australia, the share of China's total trade settled in RMB has
declined over recent times. After peaking at almost 30 per cent in mid 2015, that share is
currently around 15 per cent. The decline in the share of RMB payments for imports has
contributed to a decline in the stock of RMB deposits in the offshore centres given that supply of
RMB to these centres is largely through RMB trade payments.
As Dr Ma touched on earlier today, part of this rise and subsequent fall in offshore RMB deposits
reflects changed expectations about the future path of the RMB. But there has also been some
underlying growth in demand for offshore RMB deposits for transactional purposes, with
investors actively seeking to manage their exposure to exchange rate fluctuations.
So putting all this together, there has been significant progress on many fronts. Indeed, there has
been more progress than many observers expected. There is, though, still some way to go for
the RMB to be a truly internationalised currency.
Challenges and Opportunities
An obvious question then is how to build on the progress that has been made.
One lesson from experience elsewhere is that having an internationalised currency requires an
open capital account. It requires allowing domestic citizens to buy and sell assets overseas and
allowing non-residents to buy and sell domestic assets. The flows associated with these
transactions generate depth in financial markets and provide a stimulus to the development of
hedging markets. This then encourages more transactions: a form of virtuous circle develops.
This was certainly the case here in Australia with the internationalisation of our currency.
Interestingly, though, at no point did we have a strategic objective of having an internationalised
currency. Instead, it happened rather organically as a result of market forces in an open system.
China has been gradually moving in this direction, but the process of opening up has its
challenges.
Two of these are worth pointing out. The first is managing the volatility in capital flows that can be
associated with a more open capital account. The second is managing the implications for global
markets and investment patterns.
The first of the challenges is one that faces any country moving from a highly constrained
system to a more liberal system. As the constraints are lifted, people adjust their portfolios in
ways they previously could not. These adjustments can lead to sharp and disruptive movements
in market prices, particularly exchange rates, especially when markets are still not fully mature.
To date, the Chinese authorities have largely avoided this volatility in market prices, although
changes in expectations for the path of the exchange rate have affected capital flows into and out
of China.
For a number of years up until mid 2014, the RMB had been considered a 'one-way' bet to
appreciate against the US dollar. Foreign capital flowed into China as investors sought to take
advantage of the higher returns available, but also the appreciation of the RMB. As this capital
flowed into China, the central bank offset some of the upward pressure on the exchange rate by
purchasing foreign currency and buying foreign assets.
Over the past couple of years, though, things have changed, with the RMB depreciating against
the US dollar, alongside persistent expectations for further depreciation. Chinese residents have
taken advantage of some new freedoms to increase foreign investment and the depreciating
exchange rate has increased their incentive to do this. Mainland companies also appear to have
delayed their export receipts and pre-paid for imports in anticipation of the RMB being weaker in
the future. And they have also boosted their foreign currency deposits by holding onto foreign
currency trade receipts (rather than converting them to RMB) and using them to repay foreign
currency loans.
In response to these changes, the Chinese authorities have sold some of the foreign assets they
purchased previously. As a result, China's foreign currency reserves have declined from a peak
of US$4 trillion in mid 2014 to around $US3 trillion now. Fewer foreign assets are now held by the
central bank and more are being held by other Chinese entities. As the People's Bank of China
has stated, this is a desirable shift.
The Chinese authorities are understandably concerned that, left unchecked, the turnaround in
capital flows could be destabilising. As a result, there has been some tightening up in the ability
of Chinese residents to purchase foreign assets. The available data, as well as reports from
China, suggest that these measures have slowed the outflow of capital.
It should not come as a surprise that the Chinese authorities are proceeding cautiously and have
sought temporarily to slow outflows or inflows from time to time. While many countries have
liberalised their capital account and made their exchange rate more flexible, few, if any, have
done so without causing at least some disruption to their domestic financial system.
Short-term controls arguably can have a positive effect on financial stability in China by reducing
the risk of a disorderly currency adjustment and pressures in Chinese financial markets. But
there is a balance to be struck here, as tightening up controls runs counter to the longer-run goal.
One consideration is the signal that a tightening of controls, after several years of liberalisation,
could send to investors about how the government perceives the balance of risks facing the
economy. A broad based and persistent tightening of capital controls might also exacerbate
domestic vulnerabilities, by causing domestic liquidity to be greater than might be desired from a
strict macroeconomic management perspective. Ultimately, balancing these competing risks is a
difficult task.
The second challenge for China is dealing with the implications for the global financial system.
Unlike the challenge of dealing with volatility, this challenge is not one that most other countries
have faced. It is an issue for China because of its size. When Australia opened its capital
account the rest of the world hardly paid attention. But this is not the case for China. The rest of
the world is watching and it has a strong interest in the outcome.
Chinese gross portfolio flows remain small relative to the size of its economy. As my
predecessor, Glenn Stevens, noted, if China's gross portfolio flows were equivalent to 5 per cent
of GDP in 2015 - the figure for many other countries in Asia and a bit less than that for Australia
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- China would account for a little more than one-fifth of global portfolio flows.
Because of China's size, investment by Chinese entities abroad has the potential to affect the
prices of many assets significantly. We have already seen some signs of this with, for example,
housing prices in some cities being affected by the inflow of Chinese money. The nature of the
foreign assets owned by Chinese entities is also changing, as the central bank has a different
portfolio composition from that of most other Chinese entities.
In many countries, a related issue is the purchase of domestic assets by Chinese state-owned
enterprises. There have been a few high-profile cases where governments have blocked deals
by Chinese state-owned enterprises. But, by and large, most countries, including Australia, have
welcomed Chinese investors in a wide range of sectors. Chinese capital is helping to build
businesses and stronger trade links. So there are a lot of issues to be managed here.
Conclusion
To conclude, China is going through an important transition. It was not that long ago that the
Chinese currency could be used only within China's borders. In contrast, today China has the
ambition of having a global currency. The effects of this transition - involving the
internationalisation of the RMB and the opening up of the capital account - could ultimately be as
wideranging as were the effects of China's ascension to the World Trade Organisation. Managed
well, this transition can be a win-win for both China and the rest of the world.
Thank you.
Economic Integration, 27(3), pp 329-365, available at
www.hks.harvard.edu/fs/jfrankel/RMBintnztnJEI2012pg329~365.pdf.
3
These data can be found on the Statistical Tables page of the RBA website (Table B20).
4
Stevens G (2015), 'Address to the Boao Forum for Asia Financial Cooperation Conference', Audio address,
Reserve Bank of Australia, Sydney, 30 July. Chinese gross portfolio flows were equivalent to a little less than
1 per cent of GDP in 2015.