Financial markets have long measured the renminbi against the US dollar. But while the greenback is still the biggest component in the basket, China in recent years has benchmarked the value of its currency against a much broader group of currencies. Is the dollar-centric view becoming dated?
Looked at another way - from the viewpoint of China’s trading partners around Asia - the renminbi offers certain stable attractions when compared with the dollar.
Forex markets tell the story. Since the 2008 Global Financial Crisis, the renminbi has become much less volatile versus a basket of major Asia Pacific currencies (South Korean won, Singapore dollar, New Taiwan dollar, Thai bhat and Philippine peso, equally weighted). By contrast, the US dollar has been inflicting similar levels of volatility across the region in the post-GFC period. By some measures, the renminbi has never been more stable for Asia than now. For example, the spread in standard deviation between the Asia/renminbi exchange rate and the Asia/dollar rates recently hit its highest point in at least two decades.
This matters to investors and to companies in Asia. About 74 per cent of Asia’s exports are billed in dollars - the rest is done in euros (5 per cent) and other currencies (21 per cent, including the renminbi). Yet in ASEAN alone, trade with China has more than doubled since 2010 (China has long been the bloc’s biggest trading partner). The numbers suggest, if the current trend persists, ditching some dollars for renminbi could arguably give some of Southeast Asia’s more trade-exposed companies better exchange rate stability - with less hedging costs and a steadier portfolio of working capital and debt.
There are other attractions to the renminbi’s stability. Investors holding Chinese currency can opt to park their cash in assets with better risk-adjusted return. In the past two decades or so, renminbi Chinese government bonds - with tenors of seven to 10 years - have produced better total returns (120 per cent) than the US (80 per cent) and European (29 per cent) equivalents did in dollars, and have fared better since the pandemic while the other two corrected.
Of course, the renminbi is still not freely exchangeable. This is the biggest barrier to the Chinese currency’s greater internationalisation, and why the renminbi still punches beneath its weight. It currently accounts for around 1.9 per cent of global cross-border payments, according to SWIFT data, or around 2.8 per cent of foreign exchange reserves sitting at central banks, according to the IMF - tiny fractions that are out of whack with China’s huge global economic clout.
But that’s the rear view. The renminbi’s use will only expand as China further opens and deepens its onshore market, where global investment has room to rise from the low single digits at present. Beyond China’s borders, countries and companies will continue looking for alternatives to hedge their exposure to US monetary policy, which can often run counter to their domestic economic cycle. For Asia’s investors and treasurers the relatively stable attraction of the renminbi may make it an obvious choice.