Front-page of Today’s FT is yet another signal that geopolitics of money is shifting–banks are proposing renminbi settlements to corporate customers for trade deals with China. This shift by banks is not merely a new service that has been requested by customers in past, but also a useful tool to align their interests with the political machinery in Beijing. Though trade in renminbi has jumped 20 times in the last year to about $10bn, it is still dwarfed by $2,800bn of trade that happened across China’s border last year. This development for renminbi, coupled with opening up of the domestic bond market, is definitely a step toward a reserve currency status, far away though the status might be.
Why far away?
Renminbi is still pegged to the dollar, and the PBC, the central bank of China, is an active player in the renminbi currency market to maintain the avowed floating peg. For renminbi to be a reserve currency, the currency must float. At this time, it is hard to see why PRC will open itself to whims of global capital any time soon, especially after the peg has served them so well through the financial crisis, helping them fuel a double digit GDP growth and amass about $2.5 trillion of foreign currency reserves. Letting the renminbi be fully convertible means surrendering a major macroeconomic lever, and I don’t think the party is looking to do that anytime soon.
I would love to understand what steps (other than removing the peg, of course) would PRC need to take to let renminbi float freely. Thoughts?
Prasad Capital 