The band in which the Chinese RMB is allowed to float is likely to be increased from 1 per cent to 2 per cent this year as part of the liberalization of management and internationalization of the currency, according to Dr Yuanzheng Cao of the Bank of China.
In a wide-ranging speech on the future of the RMB, Dr Cao, chief economist and a director of the government-owned bank, predicted at the IO&C conference that the current account would enter a stable period of development.
“It is expected that the full year trade settlement, for 2013, will exceed RMB 4 trillion (about US$645 billion), an increase of 25-30 per cent year-on-year, of which RMB 2.5 trillion will be in goods trade.Trade in services is expected to reach 1.1 trillion,’ he said.
There was “huge growth” potential for capital projects. RMB-denominated direct investment was expected to reach more than RMB 400 billion this year.
“On the solid foundation of Hong Kong’s offshore market, it is expected other offshore RMB markets will develop rapidly. By the end of 2013, total deposits in the offshore markets will reach RMB 1.25 trillion, divided equally between Hong Kong and other offshore markets,” Dr Cao said.
“Due to the huge market potential, competition between financial institutions will intensify, which will stimulate financial innovation and market development.”
During another session at the conference, Susan Lin of Citi predicted that Taiwan would become another offshore RMB centre. Lin, Citi’s managing director and regional head of Yield Book/Citi Fixed Income Indices, said the new “Dim Sum” bond market was good for RMB exposure. That market started, in 2011 with US$25 billion; it was now worth US$160 billion.
Lin said a high proportion of the Dim Sum market was unrated because there was little incentive for the issuers to pay for ratings since demand was very high. Therefore, the bonds were not necessarily “high yield”.
Dr Cao said, in his keynote address, that since the RMB was officially used for cross-border trade settlements, in July 2009, it had grown rapidly. Currently, more than 10 per cent of the trade with China has been settled with RMB, but this is still bilateral.
“Further RMB internationalization depends on the multilateral process… This depends on the use of the RMB in international investment and financing,” he said.
Dr Cao said non-residents’ holdings of RMB would speed up as the currency moved towards full convertibility and attain a reserve currency functionality.