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Cover Stories Series 2012> A Roadmap for Change> Archive
UPDATED: November 19, 2012 NO. 47 NOVEMBER 22, 2012
A More Global Yuan
Sales of RQFII products prove international demand for the renminbi is growing
By Lan Xinzhen

The RQFII funds are performing well in terms of investment returns. Open market figures show that all the RQFIIs are making money, with net value growing between 0.17 percent and 3.76 percent. The top three return makers are the EFUND CSI100 ETF, the CSOP A50 ETF and the ChinaAMC CSI 300 Index ETF.

Due to their stable performance and high market demand, many RQFIIs are pressuring Hong Kong's financial authorities to appeal to expand RQFII quotas. According to a report by Hong Kong Phoenix TV, Hong Kong financial authorities also think present RQFII should be further revised.

At present, only fund management companies and insurance companies are qualified for the RQFII, and there are still limits on the investment proportion of stocks. Moreover, the 70-billion-yuan quota was too small compared with the huge offshore renminbi reserves in Hong Kong.

Therefore Hong Kong's financial officials had to seek help from the CSRC, requesting to increase the RQFII threshold.

Toward internationalization

Other good news from the CSRC is that the commission, in cooperation with Hong Kong financial authorities, is studying mutual recognition of cross-border funds.

This policy will allow fund products recognized by supervising authorities from the mainland and Hong Kong to be listed on each other's market without further recognition. Similar policies have been carried out for years in EU countries.

If this policy is adopted, fund products from the mainland can be sold in Hong Kong and vice versa. The renminbi will become the leading currency in the capital markets of both places.

According to a report issued by the Peterson Institute for International Economics in the Untied States on October 22, the renminbi's influence has been greatly enhanced and the renminbi has become the dominant reference currency in East Asia. In this region, seven currencies out of 10 are more closely linked with the renminbi than with the dollar.

The Royal Bank of Scotland (RBS) issued a report on the same day saying that the current global climate favors the Chinese currency as both the U.S. dollar and the euro are under pressure and that global investors are looking for an alternative reserve currency. The RBS expects the renminbi to become fully convertible in the next five years, which will further globalize the currency.

However, Guo Tianyong, a professor of finance at the Central University of Finance and Economics, says the global economic recession cannot be the major driving force behind the internationalization of the renminbi.

The internationalization of a currency depends on the world's confidence in it, the convenience of currency settlement and its usage in global trade, says Guo.

Wei Yanshen, a researcher at the Institute of Asia-Pacific Studies at the Chinese Academy of Social Sciences, says the economic strength of a country dictates whether a currency goes international. Therefore, the internationalization of the renminbi should move forward based on China's internal dynamics rather than by external factors like economic recession in the West.

China's economic growth and the progress in multilateral trade have further improved the international status of the renminbi, says Wei. Since entering the WTO, China has been increasingly integrated in the global economy.

Growing economic ties with other countries have increased the demand of the renminbi and pushed forward the process of its internationalization. Today, China takes up 22 percent of all manufacturing trade in East Asia and has become a regional trade center.

As the world's biggest exporter and a net creditor nation for more than a decade, and because of its economic strength and stable environment, China is in excellent shape to internationalize the renminbi.

However, related Chinese departments have made steady progress in internationalizing the renminbi. At the end of February, China extended cross-border renminbi trade settlement to the whole country.

In June, six ministries and commissions under the State Council jointly issued a list of renminbi settlement enterprises in export goods subject to special supervision. The CSRC also said it would further expand the pilot scale of RQFII and investment quotas, accelerating capital account convertibility of its currency.

Wei adds that during the process of promoting renminbi internationalization, the renminbi settlement business for cross-border trade has shown powerful growth. However, China should be fully aware of the problems and risks associated with internationalizing its currency.

For example, the acceptance of the renminbi by foreign traders should be further improved. Moreover, preventing risks and ensuring safe economic and financial operations are also important on the path to internationalize the renminbi.

Email us at: lanxinzhen@bjreview.com

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