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Opportunities Surrounding the Chinese Renminbi (RMB)

China's economy is the second largest in the world and has become a key driver of global growth. Although the Chinese government is not yet prepared to open its economy to the free movement of capital and allow full convertibility of its currency, it has managed to push international use of the renminbi (yuan) to over 10 percent of China's foreign trade volume within a span of four years.

Opportunities for Whom?

The globalization of China's currency allows greater flexibility in payment transactions and investments for companies doing business in the Chinese market, working with Chinese partners, or planning to enter the market in China. A rapidly growing offshore market, primarily in Hong Kong, has made it easier to purchase renminbi at an offshore exchange rate (CNH), with cross-border trade also reaping the benefits:

  • Sellers are able to reduce their currency hedging expenses while lowering their prices because they can invoice in the local currency.
  • Buyers profit from lower prices with a hedgeable and, over the past few years, easily calculable currency risk (the yuan has been under pressure to appreciate for years).
  • Exporters reduce administrative costs. For example, they do not incur additional expense for permits from the State Administration of Foreign Exchange to conduct foreign currency transactions.

Cross-Border RMB Payments Still Regulated; Offshore Use Unlimited

While cross-border payments for buying and shipping goods and executing service contracts are only possible with provision of the necessary documents, outside China there are no limitations, and the currency is fully convertible.

The Offshore RMB Market Has Been Booming for the Past Three Years
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USD/CNH and USC/CNY
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The onshore and offshore rates for the renminbi (CNY and CNH, respectively) move tightly together. The CNH-based renminbi has greater flexibility in international commercial transactions.

Regulators Focusing on Capital Account Liberalization

China is likely to attempt gradual cross-border capital account liberalization while transnational business activities and investments will continue to pick up steam.

Combined with local finance reforms, a policy of supporting Chinese foreign direct investments, expansion of local and foreign investor programs, and a gradual lowering of existing limits on buying foreign currencies, we can expect to see stronger integration of China into global financial markets in the coming years.

Will the Renminbi Become a Global Currency?

The basic requirements for a global currency are its use in international business or financial transactions, capital account convertibility, and its use as a reserve currency.

The yuan has taken on increased relevance for commercial and financial transactions and will continue doing so. Whether the yuan will become a significant reserve currency is closely tied to its capital account convertibility.

Its transformation into a global currency will require further deregulation in the financial markets, in its exchange rate, and in its capital account convertibility. Moreover, modern payment systems will be important for transparent and reliable interbank payment transactions.

Bilateral agreements between the Chinese government and individual countries will probably lead to a targeted proliferation of the renminbi, as demonstrated by the agreement between China and Australia (direct convertibility of the two currencies).

Additional information about the renminbi can be found at: https://www.credit-suisse.com/conferences/aic/2011/en/reporter/day4/day4_4.jsp

Contact: Peter A. Marti; peter.a.marti@credit-suisse.com; +41-44-333-1764Image removed.

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