Internationalisation of the renminbi has been overplayed and is happening at a far slower pace than most observers think, argues the global head of currency strategy at US custodian Brown Brothers Harriman.
“For some reason Chinese officials have bought this idea that if China sells goods to Hong Kong, they count as exports, and when they are invoiced in HK dollars and converted into RMB that counts as internationalisation,” said Marc Chandler during a recent visit to Asia.
Take away cross-border currency conversion between China and Hong Kong, and a much smaller proportion of world trade is denominated in renminbi.
Hong Kong accounted for almost half of offshore renminbi payments in July, noted Standard Chartered Bank. In August, Rmb5.5 trillion was converted into Hong Kong dollars and other currencies in Hong Kong, according to the Hong Kong Monetary Authority.
“A big chunk of what people think is internationalisation of the RMB is really the ‘sinification’ of Hong Kong,” said Chandler.
Moreover, usage of the currency is rising slowly even from a very low base, he noted. In September China’s currency accounted for just 1.64% of global payments, up from 1.57% in July, according to Swift's RMB tracker.
Indeed, while inclusion of RMB in some countries’ foreign reserves has fuelled talk of the unit becoming an international reserve currency, Chandler pointed to the tiny proportion it still accounts for of global reserves.
For instance, the UK's RMB sovereign bond issue last month – the first by a Western government – was for Rmb3 billion ($490 million); as compared with the country’s currency reserves of $138 billion as of end-September.
Chandler also questioned the extent to which the issuance of offshore debt, which is predominantly conducted in Hong Kong, could be considered part of the internationalisation process.
That is the equivalent of saying Jersey is offshore in relation to the UK or the Cayman Islands to the US, he said. "Cayman and Jersey act as offshore centres, but it's about tax minimisation strategies and not internationalisation per se."
Another issue around the reported growth in RMB use is the falsification of foreign exchange invoices by companies in China, said Chandler. The country’s State Administration of Foreign Exchange in September said it had uncovered $10 billion in false foreign trade documents as part of an investigation it started in April last year.
Because small companies find it hard to obtain loans in China, one ruse is to import commodities and use them as collateral against debt issuance, he noted. Some companies have also exaggerated the value of their exports in this way, he said.
These activities bypass Chinese capital controls, but much of these flows on paper look like legitimate trading activity and are therefore viewed as part of the RMB’s internationalisation, said Chandler.
One way of determining the scale of the problem is to look at the gap between what China says it exports to Hong Kong and what the city says it imports from the mainland, he noted.
The difference between the two grew to $13.5 billion last month, its largest since the start of the year, according to Bloomberg data, and more than double the figure in September last year, according to the Financial Times.
Ultimately, a big impediment to further adoption of the renminbi abroad is the dearth of RMB-denominated assets available to foreign buyers, noted Chandler, as compared to the vast amounts of US Treasuries held by investors.
“We are at the very early stages of what’s going to be a long-term historical process. If China wants to internationalise the RMB, it must open up more.”