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The Convertibility of the Renminbi

The Renminbi (RMB), is the original name of currency introduced by the Communist People’s Republic of China during it’s creation in 1949. As of late a popular topic among economist has been, “when will the Renminbi become fully convertible and freely tradable”, however, academics, politicians in China, and foreign exchange markets have all failed to give a clearly defined answer to these questions.

At best guess the RMB (also known as the Yuan) will become fully convertible within the next few years. During this time frame the RMB is also expected to become a base currency for commodities. While all signs point to the RMB completing this trend in the next few years, the excitement over this news only exist within certain caveats.

One of the powerhouse global banks (HSBC), in 2013, issued a report indicating that the RBM would enter the top three list of global currency for trade settlement by 2015, and become fully convertible in five years.

If the RMB meets the expectations of HSBC it could equal the status of the US dollar and the euro as one of the world’s most traded currencies. Analysts point to the fact of the RMB in 2012, accounting for 12% of China’s total trade, (a 9% jump from the previous year), as an example of the growth of the RMB.

One reason given as to why the RMB has not yet been made fully convertible in the world market, is the fact that this is not the first time that China has attempted to do this with the RMB. In the late 80’s and early 90’s China tried to make the currency fully convertible. It was due to an Asian financial crisis that the plans to make the currency fully convertible had to be delayed in 1996. Some speculate that fears from the last attempt to make the currency fully convertible has caused Chinese policy makers to move cautiously now.

Chinese officials fear that a laxation of government currency control will create an economic environment that encourages cash to leave China when the 44% of Chinese individuals holding over RMB10m, (that have plans to emigrate), do so. Another concern is that hot money flows will be created where money is invested only to reap the short-term benefits of favorable interest rates between countries. If this happens it would be similar to the “balloon” housing market that was the cause of America’s economic crises.

While being impressed with the RMB’s rapid relevance internationally over the last 2-3 years, HSBC is quick to admit that China is quite a ways off from fully liberalizing the currency and having it compete as a world currency.

Although cautious, China may be feeling pressure by the RBM’s faster than expected internationalization. To date the RMB is transacted in excess of 10,000 financial institutions (in 2011, that number was 900), according to HSBC. During this same time the RMB monthly average trade volume skyrocketed 40% in 2012, to RMB 245 billion, up from RMB 173 billion in 2011.

The situation is further complicated by Chinese national, who are attempting to illegally use underground banks to take money out of the country, and Chinese official fear liberalization of the currency would further encourage capital to leave the country.

Nonetheless Chinese official are seeking to further expand offshore markets that utilize the RMB before it is fully convertible. Chinese officials are creating a Pilot Free Trade Zone (PFTZ) in Shanghai where the RMB is fully convertible on a small scale with Tianjin and Guangdong actively seeking to establish special trade zones as well.

So with everything that is said there is no sure schedule as to when the RMB will be fully convertible, and traded on the world market. At close guess between 2015 and 2018 the RMB to make a move towards world currency.

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