Nov 2014

Europe to benefit from the internationalization of the Chinese currency

China is stepping up preparation for the internationalization of its currency and Europe is likely to benefit from it. Last year the Chinese government launched the Shanghai free-trade zone (FTZ), setting the country off with an ambitious plan for economic and financial reforms. If successful after the three-year test period – which will end in October 2016 – the FTZ could pave the way to the convertibility of the renminbi (or yuan), thus creating an alternative reserve currency to the dollar.

Today, the renminbi is the world’s second most used trade finance currency. The immediate goal for Beijing is to make it the main currency for trade in Asia and place limits on the role of the dollar in the international monetary system. More than 50 Central Banks have so far added the Chinese currency to their portfolios as growing trade ties and a growing number of reforms by Beijing are leading reserve managers to view the renminbi as a viable reserve currency. For instance, at the beginning of October the United Kingdom raised 3 billion yuan via a landmark offshore sovereign yuan bond and kept the yuan proceeds into its foreign exchange reserves rather than converting them into dollars or euros. Moreover, Australia publicly acknowledged a few weeks ago that it has allocated 3% of its foreign exchange reserves to renminbi. The increase of the renminbi in the foreign reserves is often done at the expense of the dollar.

Chinese currency: 100 Yuan (or Renminbi)

Chinese currency: 100 Yuan (or Renminbi)

Since the onset of the global economic crisis, Chinese officials have maintained that the US is abusing its position as controller of the main reserve currency by pursuing irresponsible economic policies. In March 2009, Zhou Xiaochuan, the People’s Bank of China (PBOC) governor, explicitly called for the creation of a new international reserve currency. An op-ed by Xinhua news agency on 22 October 2013 did not hesitate to call for a ‘de-Americanized’ world. Besides official declarations, China has also taken concrete action: since 2009, the PBOC has signed currency swaps agreements with numerous Central Banks around the world.

As China is stepping up preparation for the internationalization of its currency, Europe is seen as playing a crucial part. While the dollar still accounts for more than 60% of global – and around 55% of Chinese – reserves, the euro provides China with a formidable alternative. Today, euro-denominated assets represent around one-third of Beijing’s total foreign currency reserves (which, at US$4.2 trillion, are the world’s largest). This means that Beijing has bought around one and a half trillion euros. In October last year, the PBOC and the European Central Bank (ECB) signed a bilateral currency swap agreement for a sum of €45billion (RMB350 billion), the largest ever signed by Beijing outside the region. This October, the ECB decided to add the Chinese yuan to its foreign-currency reserves.

Today, the EU is China’s first trading partner; the two sides trade more than one billion a day. Europe is also one of the primary destinations of Chinese overseas investments and the Eurozone is now one of the major beneficiaries of Beijing’s divesting its foreign reserves away from the dollar. The internationalization of the Chinese currency is therefore likely to be a boon for Europe.