While the trend of gradual internationalisation of the Chinese yuan (CNY) is gradually ongoing, according to a recent speech at the Renminbi (RMB) Internationalisation Roundtable in Sydney by the Reserve Bank of Australia’s Deputy Governor, Philip Lowe, the central bank of Australia is taking steps to prepare for a transition to a more central role of the Chinese currency in the international payments system.
In addition is the concern Mr. Lowe expressed during his speech, saying, “The internationalisation of the Renminbi (RMB) and the accompanying process of capital account liberalisation in China could well turn out to be one of the seismic events in global capital markets over the coming years.”
While in the long run, the Chinese yuan exchange rate transitions to a market determined pricing and the long ongoing capital account liberalisation progresses, the RMB is set to become one of the major global currencies, however not all central banks seem as prepared as the RBA to face this process.
RBA Consistent in Its Renminbi Effort
After establishing a representative office in Beijing and several trips by RBA staff to the Chinese capital, the central bank has gathered enough information to make a decision and divest a portion of its currency reserves into the Renminbi. According to the Deputy Governor’s speech, currently the central bank holds around 3 percent of its net foreign reserves invested in RMB.
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While the bilateral local currency swap agreement between the RBA and the People’s Bank of China (PBOC) was signed way back in 2012, and has provided some reassurance to the local market about the availability of RMB liquidity regardless of emergency developments, an RMB clearing bank still hasn’t been designated to the country. Other countries, such as the UK, Germany, Luxembourg and South Korea have followed the process.
According to Mr. Lowe, “RBA is currently working with the PBC on future RMB clearing and settlement arrangements, in particular the establishment of an “official RMB clearing bank” in Australia.”
Benefits from an Official CNY Clearing Bank
According to the Deputy Governor’s speech, “Official RMB clearing banks are afforded more direct access to China’s onshore RMB and foreign exchange markets than other offshore institutions. More specifically, official clearing banks have direct access to China’s interbank RMB payments system and receive a quota to transact in China’s onshore foreign exchange market. These changes also entail more direct access to RMB liquidity from the PBOC.”
The tradition process will be lengthy and might be painful for some parts of the financial system, but the Reserve Bank of Australia is fully committed to the best interests of its economy in the long run, since China is its biggest trading partner and Australia’s still vast commodity sector, which has been driving growth in the country for more than two decades, continues to supply materials to mainland China. Ongoing efforts by the central bank are likely to result in better preparedness for the transition to widespread trade settlements in the Chinese currency.