The central parity rate of the Chinese currency has weakened in recent weeks against the world’s major currencies. HSBC currency analysts suggest further depreciation of the currency against the US dollar by the end of the year. However, this has not prevented the West – and Europe in particular – from doubling down on the currency.
Behind Europe’s investment in the renminbi there is a clear strategy of support for the Chinese currency. When the International Monetary Fund announced in December that the renminbi would join the US dollar, the British pound, the euro, and the Japanese yen in the currency basket underlying its unit of account, the Special Drawing Rights (SDR) basket, the decision was clearly political.
Even though the currency performs well and its internationalization is sustaining, its inclusion in the SDR owes much to the decision by the US to defer to Europe. The US had in fact argued for years that the renminbi should be included in the SDR only if China opened its capital account, let its currency float freely, and had a more independent central bank. None of this has happened. But after China established the Asian Infrastructure Investment Bank with the support of Europe, the US agreed to drop its objections. After all, the SDR basket plays a minor role in global finance, and admitting the renminbi was seen as a small price to pay to keep China embedded in the Bretton Woods institutions.
The currency’s inclusion in the SDR, it is hoped, will encourage China to liberalize its capital account further. Europe would also like to welcome the country to the core group of world powers that decide global monetary affairs. British Chancellor George Osborne has made it clear that he would like the City of London to be the most important offshore market for renminbi trading and services. It was no coincidence that during President Xi Jinping’s state visit to the United Kingdom in October 2015, China chose London to issue its first overseas renminbi sovereign debt.
The rest of Europe is equally enthusiastic. Today, the continent is home to the largest number of renminbi bank clearings. Offshore renminbi hubs have emerged in Frankfurt, Paris, Milan, Luxemburg, Prague, and Zurich, and most of Europe’s central banks have added – or are considering adding – China’s currency to their portfolios. Europe’s efforts could succeed; but unless China makes its currency even more widely accessible and opens its market further, they are almost sure to fail.
An earlier version of this article was published in project syndicate