To date the Chinese Rinminbi (RMB) cannot be freely traded on currency markets. Currency controls are in place to stop a large outflow of cash from China as home investors’ reserves grow. This increases the value of the RMB.
China does however represent the second largest economic power in the World, after the US, and it is highly desirable that the Chinese currency should be a viable alternative for currency investors rather than the US$ or Euro, both currencies which have been recently struggling to hold their values.
“The Renminbi, as a sovereign currency, has the greatest potential to become the third international currency,” said Professor Kate Phylaktis from Cass Business School in London.
HSBC Chief Executive Stuart Gulliver predicts RMB will become one of the world’s three main reserve currencies within 15-20 years as the U.S. dollar loses its hold with investors.
London, as the largest foreign-exchange trading center in the world, will benefit a lot from RMB trading.
Allowing the RMB to be traded, would allow private banks and wealth managers all over the World to invest in the rapidly appreciating Chinese currency on behalf of their clients without needing a physical base in Asia.
London will be competing with Asian centres for the offshore centre, such as Hong Kong. London has the advantage that it can offer a 24-hour global currency trading opportunity where the majority of US$ and Euro trades are already handled.
“In three to five years, if London works hard, it will be the trading centre for European customers, while Hong Kong will service Asian customers,” said Xia Bin, an adviser to China’s central bank.
RMB trading depends on it being used internationally as an investment currency and on being held as foreign exchange reserves. Currently 80% of foreign reserves are held are as dollars, with the Euro filling the remaining 20%.
China has started to relax controls but it needs a mature and developed financial system, open to capital inflows and allowing domestic investors to send money abroad. So it will be some time yet before London can become a trading centre for Chinese currency, and before you can easily trade or invest in the RMB. Some of the larger banking institutions do offer RMB investment products however.
Category: Currency news