Joachim Nagel: The internationalisation of the renminbi
Speech by Dr Joachim Nagel, Member of the Executive Board of the Deutsche Bundesbank,
at the Chamber of Industry and Commerce (IHK) Conference on the "Internationalisation of
the Renminbi - Opportunities for Frankfurt", Frankfurt am Main, 3 July 2013.
* * *
1 Welcome
Dear Dr Raettig,
Dear Ambassador Shi,
Dear Minister Rentsch,
Dear Dr Schuknecht,
Dear Mr Ji,
Ladies and gentlemen
First of all, I would like to thank you for inviting me to speak at today's conference on the
"Internationalisation of the Renminbi - Opportunities for Frankfurt". I am pleased to have this
opportunity to discuss the internationalisation of one of the most interesting currencies at
present.
Since its accession to the World Trade Organisation in 2001, China's GDP has been growing
at an average rate of 10% each year. At the same time, China has hugely expanded its
volume of foreign trade, overtaking Germany in 2009 as the world's foremost exporter.
Thanks to its continued current account surpluses, the People's Republic of China has
accumulated the largest foreign currency reserves in the world at USD 3.4 trillion. The
country's sheer economic size and its manifold trade relationships all over the world, as well
as the appeal of participating in its fascinating growth, awaken a desire to invest in China and
in its currency.
A survey among reserve managers revealed that 14% of respondents have already invested
in the renminbi. Of those surveyed, 37% indicated that they were considering investing in the
currency in the next 5 to 10 years.1 Given the growing significance of non-traditional reserve
currencies, there is certainly a demand for renminbi as an investment currency.
All of us, whether we are representatives from industry or politics, private or institutional
investors, have become intrigued by this remarkable process. The development of the
currency reminds many of us perhaps of Germany's economic miracle, but of course on a
much smaller scale. In the early 1950s, Germany experienced an unprecedented economic
upturn, which led it to accumulate a large volume of foreign exchange reserves and
eventually bestowed upon the Deutsche Mark the status of a global investment and reserve
currency. The renminbi is certain to have similar long-term prospects if market access is
liberalised further.
2 The internationalisation of the renminbi
The further opening of the Chinese market is therefore one of the central objectives of the
government's current five-year plan. Its goals include promoting foreign direct investment in
renminbi, supporting domestic banks in issuing renminbi-denominated loans outside of China
and facilitating the gradual development of cross-border renminbi settlement for private
investors.
Additionally, Hong Kong's role as a renminbi offshore centre has been further bolstered.
Already, over 10,000 banks worldwide are offering their customers the opportunity to settle
transactions in renminbi, a remarkable increase from just over 900 banks in June 2011.2
Although international use of renminbi - approximately 0.69% of all transactions worldwide
are currently settled in renminbi3 - does not reflect China's economic prowess at present,
with its increasing convertibility, the currency has the potential to become one of the future
global reserve currencies.
Cross-border use of a currency depends on many factors, one significant factor being the
size of the economy, both in terms of gross domestic product and trading activities. It is also
essential that investors have confidence in the monetary and fiscal policy of the economy in
question, as well as its legal framework. Moreover, the breadth, depth and liquidity of the
domestic financial market play a decisive role.
Reserve currencies usually undergo a multi-stage internationalisation process, starting as a
trading currency, developing into an investment currency and finally becoming a reserve
currency. These stages were also evident in the development of the Deutsche Mark.
The introduction of the Deutsche Mark in 1948 set the stage for the rapid recovery of the
German economy after the Second World War; this was followed by Germany's
"Wirtschaftswunder" in the 1950s and 1960s. With the introduction of the Bretton Woods
system, the Deutsche Mark's exchange rate was pegged to the US dollar. In this system of
fixed exchange rates, Germany's frequent current account surpluses manifested in growing
gold and foreign currency reserves at the Deutsche Bundesbank.
What stage is the renminbi at now?
The renminbi is a fundamental factor in China's economic development and plays an
important role in the Chinese boom. In 1994, China decided to peg its currency to the US
dollar. By fixing the exchange rate, China bolstered its export-driven growth strategy. In July
2005, the People's Bank of China moved away from the dollar peg and fixed the renminbi's
exchange rate to a trade-weighted currency basket. The widening of the fluctuation range in
April 2012 from +/-0.5% to +/-1% further advanced the process of liberalising the exchange
rate. Despite the global financial crisis, China's real economy continued to grow strongly
even after 2008. And since 2009 in particular, China's continued high current account
surpluses have led to a further expansion in its foreign currency reserves.
Summing up at this stage, it is clear that the internationalisation process of the Chinese
currency is taking place more gradually than was the case with the Deutsche Mark, which, at
times, was subject to radical upheaval, such as the collapse of the Bretton Woods system
and the EMS crisis in the early 1990s.
Although the US dollar has been the most commonly used currency for China's trade up to
now, use of the renminbi has increased a great deal over the last few years. Between 2010
and 2012, the percentage of trading transactions settled in renminbi has jumped from
virtually zero to around 12%, and is likely to increase further.4 As a result of the currency's
growing use in foreign trade, international renminbi deposits in Hong Kong have also
increased considerably to over 670 billion renminbi (approximately EUR 83 billion).5
To come back to my question at what stage is the renminbi now? We can ascertain that the
renminbi has already achieved the first step and become a trading currency. Because of the
capital controls still in place, the renminbi is currently in transition from being a pure trading
currency to being an investment currency. While both inward and outward direct investment
is now possible, portfolio investments will continue to be regulated. Nonetheless, China
intends to further develop existing initiatives in this area.
What opportunities will be opened up to China and the renminbi by having an offshore
market, which clearly sets the renminbi apart from other freely tradable currencies?
The Chinese government established the offshore renminbi market to expedite the transition
from being a currency purely intended for trading to an investment currency. By taking this
roundabout approach, China is able to establish its currency internationally and protect its
domestic financial system at the same time, until the government deems the capital market
to have sufficient breadth and depth for a complete liberalisation. From demand side, China's
growing economic importance and its manifold trade and investment relationships has led to
a steadily growing need around the world for renminbi transactions. Due to the capital
controls still in place, the only opportunity to participate in the internationalisation of the
renminbi is via the offshore market.
3 Offshore centres: opportunities for Frankfurt as a financial centre
In the past, the internationalisation of major currencies always coincided with the growth of a
country's economic power. In the 19th century, between 60% and 90% of international trade
was conducted in British pounds. After the Second World War, the US dollar overtook the
pound as the most important investment and reserve currency. In 1999, the euro followed in
the footsteps of European currencies and with that the Deutsche Mark. Today, the euro is the
second most important investment and reserve currency after the dollar.
Given China's growing economic importance, the internationalisation of the renminbi seems
long overdue. The Chinese government has been actively promoting this process since
2009. The unique separation of the onshore and offshore currency market, in particular, will
facilitate the transition from a currency purely intended for trade to an investment, and
potentially, a reserve currency.
The Chinese government chose Hong Kong as the first offshore centre but limited the
volume of liquidity allocated to the market. Almost 80% of offshore renminbi trade is currently
settled in Hong Kong.6 Based on the positive experience to date, China plans to extend the
currency's offshore market.
After the positive experiences with Hong Kong, other financial centres are now becoming
more important for the renminbi, too. Since July 2012, around 4% of renminbi trade has been
conducted both in London and in Singapore.7 Singapore and Taipei have both been
strengthened by the appointment of a Chinese commercial bank as a clearing bank for
renminbi transactions in their respective financial centres.Frankfurt, too, is trying to establish
itself as a renminbi trading centre in Europe. The Bundesbank welcomes all these initiatives
and sees them as a step in the right direction, towards the free movement of capital. The
high level of interaction between China's and Germany's real economies highlights the
necessity for a more active renminbi trade, perhaps even using Germany as a hub.
I would like to conclude with this ideas and l look forward to discussing with you the potential
in and for Frankfurt as a financial centre for renminbi, and perhaps at the end of our
discussion, we will be able to answer the question together as to what opportunities this may
hold for Frankfurt.
Thank you very much for your attention.