(26 September 2018 – Australia) Chinese Renminbi (RMB) currency trading volumes are set to expand in Australia as the Chinese government encourages further capital market liberalisation according to a report released last week by the Reserve Bank of Australia (RBA) titled “RMB Internationalisation: Where to Next?”
The report warns that increased regional capital flows could however result in “possible financial stability challenges” for Australia if capital flows became more volatile. The paper estimates there is now a CNY deposit pool of up to A$8 billion in Australia with steadily increasing import and export trade volumes with China invoiced in RMB, albeit from a low base. The report suggests only 0.5 percent (A$600 million) of Australian exports are RMB denominated against 2.5 percent (A$1.5 billion) of Australia’s imports from China invoiced in RMB.
“China's push to make its own currency – the renminbi (RMB) – available for use by non-residents was a catalyst for important reforms. Since the RMB internationalisation policy began in 2009, not only is the RMB now in greater use internationally, capital flows more freely across China's borders, the exchange rate is more flexible and domestic interest rates are more market determined. In time, the RMB could emerge as a widely used regional currency in Asia.”
A more internationalised RMB could see it feature more prominently in Australian economic and financial transactions. The report says that this would mean Australia would benefit from greater access to capital from offshore, but warns that it could also have some possible financial stability challenges in the medium term if the volatility of capital flows increased. China’s Belt and Road Initiative (BRI) is also likely to become an important driver of yuan usage in Asia. Strong participation by Chinese companies in the construction of BRI projects will increase demand for CNY (Chinese Yuan) trade settlements.
The first phase of liberalising the currency, from 2009 to 2015, served as a catalyst for important financial reforms in China. These reforms have allowed market forces to play a more decisive role in the allocation of resources in the economy, and further opened up China to the rest of the world. If the next phase of liberalisation sees a much larger use of the Chinese currency in the Asian region, it would significantly increase direct financial linkages between the Asian region and China. The CNY surpassed the AUD as the world’s fifth most traded currency in recent years according to official data from the Bank for International Settlements (BIS) behind the USD, EUR, GBP and JPY. The Aussie Dollar is ranked eighth in terms of global currency trading volumes.
As part of East & Partners Global Business FX program, 1,853 importers and exporters across Asia were interviewed on where they forecast the USD/CNY rate to settle by the end of the year. Highlighting the high level of uncertainty characterising FX markets currently, their forecasts fell in a broad range. Businesses expect the Chinese currency could weaken (rise) to as high as 7.400 or strengthen (fall) to as low as 6.389 against the US Dollar, with significant variance exhibited by geography.