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Europe’s Renminbi Romance

ROME/MADRID – The Chinese are losing confidence in their currency. Faced with faltering economic growth, the People’s Bank of China has stepped up efforts to restore stability to the renminbi, using its vast foreign reserves to prop up its exchange rate and stem the flow of funds fleeing the country. The PBOC’s governor, Zhou Xiaochuan, has repeatedly stated that there is no basis for continued depreciation, but few in the country seem to be listening. In the last quarter of 2015 alone, the net capital outflow amounted to $367 billion.

And yet crumbling confidence within China has not prevented the West – and Europe in particular – from doubling down on the 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 basket, the decision was clearly political.

Few would argue that the renminbi meets the IMF’s criteria for inclusion in the SDR currency basket. It is not freely convertible, and access to it is limited both inside and outside China. Some foreign branches of Chinese banks offer renminbi-denominated deposit accounts, and qualified investors can purchase debt instruments pegged to the currency in mainland China. But the volume is capped.

To be sure, the renminbi performs well in trade-related statistics. According to the financial network SWIFT, it is the second most used currency in trade finance, having overtaken the euro, and ranks fifth in terms of international payments. These figures are inflated, however, by transactions with Hong Kong, which accounts for roughly 70% of international trade payments settled in renminbi. Vanishingly few contracts are issued in renminbi; the dollar remains king in invoicing, with the euro a distant second. Even the shares of the Japanese yen and the British pound, though very small, are still higher than that of the renminbi.