Renminbi growth: ‘it’s been a pretty dramatic change over the last few years’

World Finance speaks to Mark Boleat, Policy Chairman at the City of London Corporation, to talk about the future of the Chinese yuan

January 9, 2015

The Chinese yuan or renminbi – meaning People’s Currency – is the seventh most traded currency. And after years of being undervalued, it’s now emerging as the major new player on the foreign exchange market. World Finance speaks to Mark Boleat, Policy Chairman at the City of London Corporation, to discuss the future of this currency.

World Finance: Well Mark, the yuan has always had a lot of potential, but it’s been very inaccessible. How does it stand today?
Mark Boleat: It’s becoming more accessible as the Chinese economy grows. As China’s trade with the rest of the world grows, more businesses need to be able to trade in the Chinese currency. A business now trading with China – or wanting Chinese currency – can get whatever it needs.

It’s been a pretty dramatic change over the last few years. It reflects what’s happening in China, and we’re going to see more to come.

It’s impossible to keep a currency that’s traded undervalued

World Finance: So the seventh most used currency; surely this is just a reflection of China’s massive population, rather than being a globalised currency?
Mark Boleat: It’s a reflection of the size of the Chinese economy. It’s not just the number of people, it’s the output of the economy. And we know that China’s economy is now very large; on some measures it’s even larger than America’s, and it’s growing very rapidly.

World Finance: Well historically it’s been undervalued as much as 37.5 percent against its purchasing power; so how flexible is it today?
Mark Boleat: It’s impossible to keep a currency that’s traded undervalued. Because by definition if people think it’s undervalued they’ll buy it, and therefore it will cease to be undervalued.

Now for a time, when the Chinese authorities were seeking to control the currency, yes: they could influence the rate, and it was widely perceived to be undervalued.

One should be slightly cautious about looking at the purchasing power parity rate, because on that basis a load of currencies are undervalued, and others are overvalued. But in relation to the market, the Chinese currency is no longer undervalued. It is at the market level, and indeed at times it is depreciated a little; at other times it’s appreciated.

So that reduces the attraction of holding it as an investment; but it increases the attractiveness of holding it and using it as a liquid currency at the market value.

World Finance: So what opportunities are there to invest in it today?
Mark Boleat: Most of what we’re seeing in Britain is not investing. It’s the use of renminbi for trading. Those businesses that actually need to trade can get the renminbi they want if they need to buy or sell.

In terms of investing, that’s not going as quickly; one wouldn’t expect it to. We’ve had a number of bond issues from banks, and most recently from the British government. Those issues have been very quickly picked up, so there is an investment demand.

We’re going to see not just the British government, but other governments, wanting to hold renminbi in their portfolio of foreign exchange reserves. Businesses will want to hold some renminbi. We are going to see investment, but that’s going to take a bit of time until people are more confident about investing in China, and if they want to do so with Chinese currency.

World Finance: Do you think there’s added risk considering the Chinese government’s heavy-handed approach to fiscal and monetary policy?
Mark Boleat: There’s risk investing in any currency, whether it’s the euro, dollar, sterling. Some of the concerns about China are really about the unpredictability still of the regulatory environment. A large number of businesses quoted on the Chinese stock exchanges are semi-government owned. So it isn’t quite the market that we have in Britain: there isn’t the same volume of authoritative research; there aren’t the same number of investors; there isn’t the same liquidity.

So at the moment, China’s investment market is still pretty thin for the size of the economy; that is going to change pretty dramatically.

We recently had the Hong Kong-Shanghai Stock Connect, which makes it easier for institutions to invest in China. We’ve got a direct quota for investments from Britain. So we’re seeing a lot of measures to open up the Chinese market, and I suspect over the next few years you’re going to see more investment offers in Britain of securities denominated in renminbi, and securities traded predominantly in China.

Most of what we’re seeing in Britain is not investing

World Finance: Well London is at the heart of the offshore market for renminbi, so why London? And what are the opportunities for London and China?
Mark Boleat: London is the biggest international financial centre in the world. In terms of foreign exchange it’s by far the largest market in the world. So it’s natural that when you’ve got a currency that’s being used increasingly, London is going to be where it’s traded.

More than that, the Chinese authorities wanted to see London develop as an offshore renminbi market. So did the British authorities. So a lot of public support, government support, for what’s happening. We have a swap line between the Bank of England and the People’s Bank of China, which helps to underpin the market. It gives the security, it gives a guarantee of liquidity. We’ve done everything we can to make London the centre for renminbi trading.

World Finance: Now Hong Kong’s long been known as the platform into mainland China, so what kind of impact do you think this will have on Hong Kong, if the renminbi becomes more accessible?
Mark Boleat: Most of what happens in London already goes through Hong Kong. So we shouldn’t see this as being a limited market for offshore renminbi facilities, and that we’re competing against Singapore and Hong Kong and Dubai and lots of other centres.

We see a rapidly growing global market, and the more there is of trading of renminbi – for example, in Europe – the more there’ll be business coming through London.

There are lots of implications for Hong Kong as the Chinese financial markets open up. As Shanghai develops into a major financial centre in its own right. But the one thing you can be certain about Hong Kong is that the people there are very entrepreneurial. They understand market developments as fast as anyone else. And they’ll be seeking to secure their place in the growing market.