It wasn’t exactly in the same league as Orville and Wilbur Wright getting their spruce flyer 10 feet into the air, but July 6 will probably be remembered as historic too. That’s because the long-awaited renminbi settlement scheme finally got off the ground.
As discussed in WiC17, the move forms part of China’s plans to internationalise the renminbi – a process that over the longer term could threaten the US dollar’s status as the world’s reserve currency. The event thus garnered considerable analyst commentary.
HSBC’s economist Qu Hongbin was one of those commenting, via his report From greenbacks to ‘redbacks’. “China is beginning an ambitious scheme to raise the renminbi’s role in international trade and finance to reduce its reliance on the US dollar,” Qu wrote. “This will surely be a multi-year and gradual process. Yet we believe the pace is likely to be faster than many expect given China’s role as the second largest trading country and third biggest economy.”
The settlement scheme allows cross-border trade to be conducted in renminbi, and is currently being piloted using Hong Kong and five Chinese cities.
On July 6, three Shanghai-based companies became the first to settle deals. Shanghai Electric, Shanghai Silk and Shanghai Huanyu Import & Export all signed trade deals that amounted to a combined Rmb14.38 million and were settled in Hong Kong – by Bank of China, Bank of Communications, HSBC and BOC Hong Kong.
At an equivalent of less than $2 million, it amounts to a small start, but a milestone nevertheless. And greater volumes beckon. Around 100 Shanghai firms have filed applications to join the scheme, and companies from Southeast Asia have been included in the trial.
“Many of our clients from Singapore, Indonesia and Malaysia, who are in conversation with Chinese firms for trading businesses, have shown great interest in renminbi settlement,” says Leong Wai Leng, the China chairman of OCBC, the Singapore-based bank.
As the programme expands, so too will the weight of China’s currency in international trade. HSBC forecasts that almost $2 trillion of China’s trade flows could be conducted in renminbi by 2012.
But only time will tell whether this marks the beginning of the end of the dollar’s dominance.
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