sukhdave singh : global rmb – challenges and implications keynote speech by dr sukhdave singh, deputy governor of the central bank of malaysia ( bank negara malaysia ), at the hsbc forum : china globalising : rmb rising ( malaysia ) – “ global rmb : challenges and implications ”, kuala lumpur, 12 august 2014. * * * it is an honour and pleasure to be here with you this morning to talk about what is likely to be the most important development affecting the global monetary system since the introduction of euro. should the rmb become a global currency, it will transform the global financial landscape. in fact, the rmb could potentially define this century, in the same manner that the us dollar dominated the previous century. in my remarks today, i would like to share some thoughts on the potential for the rmb to achieve the status of a global currency. where it to do so, what will the potential impact be on the global monetary system? finally, i will touch on the implications for malaysia. the world is ready, is china ready? from where we stand today, the world is clearly ready for a global rmb. the question is whether china itself is ready. there is no question that the rmb would become an international currency. the only question is how big of an international currency. will the rmb ’ s role in the international trade and finance reflect the status of china as the second largest, and soon to be the largest, economy in the world? to be an international currency does not take much. you just need to lower the barriers and allow for it to be traded outside your borders. the malaysian ringgit was an international currency before we de - internationalised it during the asian financial crisis. at its peak, the ringgit accounted for about 18 % of malaysia ’ s trade settlements, which was significant given the high trade orientation of the malaysian economy. however, what we learnt from the crisis in 1997 was that for our small open economy, the internationalisation of the ringgit was inconsistent with maintaining macroeconomic and financial stability, and the benefits were not commensurate with the risks. china is not a small economy but like malaysia it is a developing economy. therefore, it is not immune to the types of vulnerabilities an international currency and the accompanying open capital account can create in its immature economy with its immature financial system. the rapid momentum of the current rmb internationalisation reflects china ’ s strong position

known as the triffin dilemma. china has been sending usds abroad because that is what it has been receiving through its current account surpluses and fdi inflows. sometime in the future, china may develop a structural current account deficit, but i do not see that happening in the foreseeable future. opening up the capital account and domestic financial system to non - resident investors could lead to even more foreign currency capital inflows. on both accounts, china will not only continue to export usd capital but could find itself confronted by persistent appreciating pressure on its exchange rate due to the high demand for rmb. promoting rmb for trade settlement will only go so far in resolving this. if more of china ’ s trade is settled in rmb, less usd will flow in, and china would need to intervene less and would have less usd to send abroad. but the question remains, with more rmb flowing in through the current and capital account, how do you get more rmb out of china in the first place? there are in fact numerous possibilities for china to create a significant pool of rmb liquidity abroad without necessarily running a current account deficit. this include rmb outflows through official aid, international loans by banks in china, foreign issuance of debt in chinese markets, direct investment abroad, inter - company loans, repatriation of corporate profits, resident spending abroad and so on. some of these are already happening. offshore rmb balances in hong kong, chinese taipei and singapore for example rose almost 40 % between late 2013 and early 2014 to rmb1. 4 trillion. these numbers are indeed encouraging, except for one thing. when the rmb is abroad, it gets homesick, terribly homesick. it yearns to return home to the land of its birth. when the legal avenues for it to do so are limited, it desperately seeks other ways to do so. and as the size of overseas rmb pool increases, the pressure of the homeward bound flows will also increase. will the qualified investor schemes, rmb clearing banks and the eventual introduction of the china international payment system alleviate this situation of the offshore rmb? yes, it would, but not entirely. in the current situation, despite the sharp increase in rmb related trade and investment transactions, the data i have seen suggests that the use of rmb remains rather lopsided and favours the flow of rmb into china rather than out of china.