Zeti Akhtar Aziz: Renminbi and China's global future
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the HSBC Reminbi Forum "Renminbi and China's Global Future",
Kuala Lumpur, 17 August 2015.
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The increasing role of the renminbi in the global financial system from a trade currency to an
investment currency and now its potential role as a global reserve currency will have
significant global implications. I am delighted to be here this morning to speak at this
Renminbi Forum. The renminbi sphere has indeed extended beyond the Asian region,
extending to other continents, to Europe, Latin America and the Middle East. The renminbi is
no longer an Asian story, but it has now become a global story. It reflects China's importance
and influence in the changing contour of the global economic and financial landscape, and
the steps that have been taken to enhance its international role.
My remarks today will focus on the increasing trend of the internationalisation of the renminbi
despite the recent challenges faced in the Chinese economy; the implications of this trend to
the region and finally on the steps that Malaysia has taken as the region transitions into this
environment.
Long-term prospects for the Chinese economy and the renminbi
After decades of rapid growth, the Chinese economy is now transitioning to a growth path
that is more sustainable. It is important to recognise that the moderation in the Chinese
economy has been in part, policy-driven, through conscious reforms to restructure the
economy to become more balanced and domestic demand-centric. These economic reforms
have been accompanied by financial and exchange rate reforms, geared towards
modernising the economy and financial system that is increasingly more integrated with the
global economy. These reforms are mutually reinforcing as the transformation of the
structure of the Chinese economy is necessary to support its integration with the world
economy and the international financial system.
The commitment to these reforms is crucial in securing the long-term growth prospects for
China, even as the Chinese economy faces short-term challenges in the recent period. The
recent one-off adjustment of the renminbi reflects a conscious effort by China to align the
renminbi to a market-driven mechanism as a part of a crucial reform to allow the renminbi to
reflect financial market developments and economic fundamentals. In an environment of
continued weakness in global trade, these short-term challenges include managing the
ongoing corrections in the real estate sector, leverage in the financial system and more
recently, the volatility in the stock market. While these uncertainties may generate concerns
over the renminbi in the near term, it needs to be recognised that the long-term growth
prospects for China remain intact, and that this will continue to strengthen the foundations
that will support the transition of the renminbi as an international reserve currency. China has
a high rate of savings, healthy external position, an inherent competitive mass manufacturing
advantage and a large educated workforce to sustain its long-term potential economic
growth.
Importantly, the narrative of the global future of China cannot be explained in isolation - it is
part of a broader account of the growing importance and greater integration of Asia, and the
stronger interlinkages with other emerging economies in the global economic landscape.
China and the region are becoming more than just global exporters. The increased efforts
are seen in the steps to develop more extensive investment and financial linkages in the
region as well as the rest of the world through key strategic initiatives such as the One Belt
One Road initiative, the Asian Infrastructure Investment Bank and the New Development
Bank. Reflecting its expanding role in the global economy and the international financial
system, the renminbi will assume greater strategic importance in facilitating the development
of these new investment and financial linkages, including meeting the greater demand for
infrastructure spending. This is also reinforced by the transition of Asia from a global
producer to a global consumer thus becoming an important driver of growth in the world
economy.
The rise of the renminbi is often associated with expectations of rapid capital account
liberalisation. In this regard, the historical experience of the major currencies over the recent
fifty years holds important lessons for the renminbi. Many advanced economies continued to
retain significant capital account restrictions until early 1980s, later than the
internationalisation process of their currencies that began in earlier decades. Such evidence
suggests that the transition of the renminbi as an international currency can commence with
the gradual and sequential liberalisation of the capital account. China's position on a
'managed convertibility' approach instead of the traditional 'fully or freely convertible' can
therefore be appreciated given the lessons from the Global Financial Crisis and the risks
associated with volatile capital flows even for such a large emerging economy like China. It is
important to note that China has made significant progress in this area. This is even
acknowledged by the IMF in its recent reports as they note that China has already achieved
full or partial convertibility in 35 out of 40 items under the capital account.
The rise of the renminbi and its implications
While the path for the renminbi to be a fully international currency will remain gradual, the
renminbi has already achieved significant milestones. It is now the second most used
currency globally for trade finance and the fifth most used currency for global payments.
One-quarter of China's total trade is now invoiced in renminbi, and this is expected to double
within the next five years. By some accounts, more than sixty central banks around the world
already hold renminbi in their official reserves.
The rise of the renminbi as an international currency would facilitate trade, investment and
financial activities that are commensurate with the continued growing importance of China in
the global landscape. Of significance to the Asian region, the rising importance of the
renminbi will reinforce the trend towards greater regional financial and economic integration.
China is already the main trading partner for most economies in the region. The increased
usage of the renminbi and the more developed regional financial markets for the renminbi
provides an opportunity to recycle savings within the region and thus support the increased
intra-regional investment activities. More renminbi-based trade within the region will create
pools of renminbi liquidity which would create a demand for instruments which would in turn
spur the development of more efficient and integrated renminbi capital markets in the region
that can contribute towards better intermediation between the surplus and deficit units in the
region.
In addition, the renminbi can be a source of stability for the global monetary system. The
increasing use and recognition of the renminbi as an international reserve asset will
strengthen the foundations of the current global monetary system that is currently reliant on
too few major currencies. With the increased economic and financial interconnectivity in the
world today and the greater potential for international policy spillovers, a more multipolar
global monetary system with more diverse sources of global liquidity would contribute
towards a more stable international financial system.
Looking ahead, these developments present tremendous opportunities for the private sector.
Indeed, trade invoicing in renminbi has already begun to spread beyond predominantly
Chinese enterprises to multinational companies (MNCs) turning to China as a key market for
their products and services. Notably, despite the initial difficulties in operationalising the
renminbi-based system, some MNCs have successfully upgraded their global invoicing and
payment systems to settle trade and working capital in renminbi with their Chinese
counterparts. This allows for significant cost-savings on foreign exchange transactions in
addition to efficiency gains from matching trade receipts to funding working capital
requirements. The increased use of the renminbi for their investment activities in China is
supported by the flexibility provided in China for movements of global funds in and out of the
country. The potential longer-term benefits from using the renminbi-based system for their
trade, working capital requirements and FDI in China is thus seen to clearly outweigh the
implementation costs.
In the more recent decade, financial investments have also gathered momentum as foreign
investors commenced investment activities in Chinese financial markets since 2003 through
the Qualified Foreign Institutional Investor (QFII) program. Wide-ranging measures, including
the introduction of China Interbank Bond Market (CIBM) foreign quota in 2009, the Renminbi
Qualified Foreign Institutional Investor (RQFII) in 2011 and the operationalisation of the Hong
Kong-Shanghai Stock Connect in 2014, are all aimed at encouraging greater participation of
foreign investors in China's mainland financial markets. At the same time, China is improving
the global renminbi settlement and clearing system through a wider network of renminbi
clearing banks and the upcoming Cross-Border Interbank Payment System (CIPS) to lower
the transaction costs for the renminbi relative to other major currencies.
Currently, there are at least five hundred global investors, including sixty or more foreign
central banks and sovereign wealth funds, that have gained direct access to China's financial
markets. Many more have access through the Hong Kong-Shanghai Stock Connect.
Malaysian institutional investors seeking to internationally diversify their investments would
need to intensify the learning curve process in the Chinese financial markets to realise its
benefits.
Malaysia: A pioneer in the cross-border use of the renminbi
Malaysia was one of the earliest countries to recognize the potential role of the greater
crossborder use of renminbi. Given China's significance as Malaysia's largest trading partner, the
settlement of trade and investment in renminbi significantly lowers costs and promotes
greater cross-border trade and investment activity. In turn, fund-raising activity in renminbi
has become a means for Malaysia to utilise the renminbi liquidity obtained through trade
settlements. Malaysia has a comparative advantage in this area, as the largest debt
securities market in Southeast Asia and as a leading centre for sukuk issuance.
As an early pioneer of renminbi initiatives, Bank Negara Malaysia (BNM) was the first
ASEAN central bank to sign a currency swap agreement with the People's Bank of China
(PBC) in February 2009. In the same year, BNM was also the first Asian central bank to
become a QFII investor and among the first wave of foreign investors in CIBM. In 2010, the
Malaysian ringgit became the first emerging currency to be directly traded with the renminbi
in the China Foreign Exchange Trading System (CFETS). In 2013, BNM signed a
CrossBorder Collateral Arrangement (CBCA) with PBC to enable the use of home currency
collateral to obtain domestic liquidity in the host country. In November 2014, BNM signed an
MOU on a renminbi clearing bank arrangement. The Bank of China Malaysia was appointed
as the renminbi clearing bank in January 2015. Going forward, BNM will work towards further
enhancing financial co-operation with PBC in the area of Renminbi Qualified Foreign
Institutional Investor (RQFII) to provide an alternative avenue for Malaysian investors to
invest in onshore Chinese financial markets.
BNM has also worked to integrate the renminbi into the domestic financial system by
incorporating the renminbi in Malaysia's Real Time Gross Settlement System (RENTAS). In
November 2013, BNM introduced the Renminbi Liquidity Facility (RLF) to licensed onshore
banks to facilitate more effective renminbi liquidity management in Malaysia. Today, the
usage of renminbi in Malaysia has grown rapidly, with the daily size of renminbi foreign
exchange volume at RMB6.7 billion. Malaysian institutions and corporations such as
Khazanah, Cagamas, Axiata and Maybank have issued renminbi bonds. With the various
renminbi financial infrastructure that has been put in place to support trade, investment and
financial flows between Malaysia and China, this trend is expected to increase. Malaysian
entities with large regional network should consider using Malaysia as the centre for their
regional renminbi transactions and thus contribute towards greater economies of scale over
time. This would in turn enable the transactions to be conducted in the most efficient and
cost effective way.
Conclusion
Let me conclude my remarks. In a short time span of six years since 2009, the renminbi has
accomplished much of its goals but there is still a long journey ahead as most international
currencies have evolved over several decades. The impact of the Chinese economy on Asia
has been significant with many countries now counting China as their largest trading partner,
and in some cases, among the largest foreign investors. Reflective of the underlying
fundamental economic changes, the rise of the renminbi, although gradual, is inevitable with
important implications not only to Asia but to the rest of the world. Undoubtedly, the renminbi
is more important to Asia than anywhere else. Given this, Asia including Malaysia must be
ready for this transition of the increased internationalisation of the renminbi and its potential
role with Asia's integration path and thus contributing towards further unlocking the potential
of the region.