A small change sometimes has big consequences. This may also be true in the coming period when Chinese banks adjust their buffer requirements. Only 6% of reserves will now have to be foreign currency. Initially, it was 8%. One consequence of the adjustment is that many banks will exchange dollars and other foreign currencies for their own renminbi. This will give the Chinese currency a boost. The central bank in Beijing more often opts for this kind of indirect action to support the renminbi. This is because direct intervention affects the international status of the currency. On the contrary, President Xi Jinping is very keen for the renminbi to play a major role in the currency world.
Beautiful successes
Initially, China seemed to have some nice successes in this regard. In 2016, the renminbi was included in the IMF's currency basket of special drawing rights. Moreover, two years later, oil futures contracts were traded in renminbi instead of dollars for the first time. However, these events have mainly prestigious connotations. Despite China's economy being the second largest in the world after the US, its share in currency trading is only slightly more than 2%. This puts the renminbi ahead of not only euro and dollar, but also pound and yen.
Countdown to 16 October
In a few weeks, more will become clear about what the future holds for China's economy and currency. This is because the Communist Party's five-yearly congress starts on 16 October. That meeting, by the way, is also an important reason why the central bank is backing the renminbi just now. Since the spring, the currency has fallen by almost 10% against the dollar to its lowest level in two years. That slide is fuelling economic uncertainty and leading to capital outflows. As Xi is keen to see a strong economy ahead of an election for his third presidential term, the boost to the renminbi comes as no surprise.
Digital currency
Although the traditional renminbi is going through a difficult period, the digital version is experiencing a period of rapid growth. In the first half of the year, the total transaction value of the currency was more than 12 billion euros. During the Winter Olympics, foreigners were also given the opportunity to pay with the digital renminbi for the first time. Currently, China is working on linking the currency with Hong Kong's payment system. That, in turn, could be a stepping stone to making cross-border payments with the digital renminbi. This gives the country a huge head start over other central banks, where crypto initiatives are still in their infancy. Who knows, this might still succeed in enforcing the major role in the currency world that China actually had in mind with the normal renminbi.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
