For the renminbi to go truly global it needs more than just cross-border trade flows. China needs to make giant strides in the opening of its domestic capital markets to allow renminbi to flow more freely between China and the rest of the world. This will speed up the renminbi’s emergence as an investment currency and bring the ultimate convergence of onshore and offshore markets closer.
The renminbi is already convertible under the current account and the offshore market is showing strong organic growth. At the end of November last year, offshore renminbi deposits exceeded Rmb1.85tn, up from Rmb1.35tn at the end of 2013 and Rmb315m at the end of 2011. We are optimistic that these flows will continue to accelerate as the proportion of China’s total trade settled in renminbi increases.
The volume, however, only tells part of the story. Offshore renminbi liquidity is comprised largely from cross-border trade settlement, retail conversion and bilateral currency swaps between China’s central bank and foreign central banks. The need to hold renminbi to buy Chinese exports is no doubt an important aspect of the Chinese currency’s international allure, but it alone cannot sustain the desire of the outside world to adopt the renminbi.