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RMB Use Internationally Picks Up but Still Well Short of its Potential

Tax and Finance

In 2010, China’s currency, the renminbi, picked up pace toward becoming a world currency. In June the Chinese government extended its renminbi trade settlement scheme to include 18 provinces and cities, as well as Guangdong province and Shanghai, which are now allowed to handle all international service transactions and imported goods’ purchases. Also, around 70,000 mainland-based entities were approved to settle deals in Chinese currency for their exported goods, up from just a few hundred before. If Hong Kong is any indication, these reforms seem set to greatly expand the renminbi’s international role.

Since this announcement, several events have further heightened the international profile of China’s currency:

July 2010: Hopewell Highway Infrastructure became the first non-financial company to issue bonds denominated in Chinese currency. It raised RMB 1.38 billion (USD 203 million) in its bond offering which took place in Hong Kong.

August 2010: Similarly, McDonald’s issued RMB 200 million (USD 29 million) in bonds—the first major multinational company to do so.

October 2010: The Asian Development Bank offers offers renminbi-denominated bonds with ten year maturities, raising RMB 1.2 billion (USD 180 million).

November 2010: Caterpillar issues RMB 1 billion (USD 150 million) worth of bonds.

November 2010: The Chinese government sells RMB 8 billion (USD 1.2 billion) of its sovereign debt to overseas investors, only its second such offering.

December 2010: Renminbi traded for the first time at Moscow’s MICEX after an inter-governmental agreement is reached in November.

January 2011: The Bank of China began allowing American firms to trade using renminbi.

January 2011: The World Bank’s International Finance Corporation (IFC) raised RMB 150 million (USD 23 million) at its first Chinese currency bond offering in Hong Kong.

Despite these developments, capital controls remain enough to confine China’s currency to a fairly limited role worldwide. The millions obtained through these bond issuances must still be approved by Chinese regulators before circulating in the mainland. Although Standard Chartered bank estimates that RMB 411 billion (USD 62 billion) was used to settle trade in 2010, this is mere pittance compared to China’s USD 2,973 billion in total trade for the year. Imports accounted for around 80% of this renminbi-settled trade, which leaves only 5% of China’s USD 1,578 billion worth of exports transacted with Chinese currency—this proportion most likely attributable to goods destined for Hong Kong for re-export.

It remains to be seen if the international momentum displayed by the renminbi will continue through 2011. Despite much progress, its widespread use internationally remains a more distant prospect.

This article first appeared on China Sourcing Blog