Yuan set to soar as global currency; European financial centres prioritise internationalisation of the RMB

International leaders from government and industry gathered today at the Renminbi Forum held in Luxembourg to discuss the rising internationalisation of the RMB.

Luxembourg’s Minister of Finance, Pierre Gramegna, and HE Zeng Xianqi, Ambassador of the People’s Republic of China to Luxembourg opened the conference that was attended by over 400 international experts and practitioners.

The Forum addressed China’s economy and its importance on a global stage, financial reform in China, the role of international RMB hubs, RMB clearing activities, RMB financial products and the structuring of RMB funds.

The slowing economic growth is carefully managed by the Chinese authorities, who described it as the ‘new normal’. Panellists highlighted how China’s slowdown is specifically linked to the housing market and industrial over-capacity. Economic growth is not equally strong in all regions and China is under-going structural change as the country moves towards a consumption-based growth model. The New Silk Road Economic Belt and the 21st Century Maritime Silk Road, together the “One Belt, One Road” initiative, will become very significant for Europe and should be watched closely.

Experts discussed the rise of the yuan’s use to settle cross-border trade and investment as well as the potential use of the currency to set prices of international commodities such as oil or iron ore. China’s yuan has become the fifth most used global payment currency. The dollar and the euro are the two leading currencies, followed by Sterling and Japanese Yen. While the exact timing of admission is still up for question, the experts considered that the renminbi is certainly becoming part of the SDR basket, the international monetary reserve currency created by the International Monetary Fund.

There has been an acceleration of financial reform in China over the past two years. The Shanghai Free-trade Zone was established, as well as the Shanghai-Hong Kong Stock Connect. RQFII quota was extended to now 12 jurisdictions. These schemes offer opportunities for international investors to access Mainland’s capital market and stimulate financial innovation beyond China.

Despite slower economic growth within China, the international use of the renminbi offers many opportunities to global financial centres. International financial centres such as Hong Kong, Singapore, Toronto and Luxembourg have seen volumes ramping up very quickly. As a result, these financial centres are going through an educational process with all potential users, explaining the advantages of tapping into China’s capital markets through RQFII or Stock Connect.

Given the growing size of the international RMB market, all financial centres should contribute their specific expertise and aim to be part of a global network, based on co-existence and worldwide inter-operability.

With the gradual opening of China’s capital account, the development of different RMB products will be crucial for the further circulation of the renminbi. Non-Chinese companies have an increased need for diversified sources of investment to hedge risks resulting from unbalanced portfolio management.

RMB-denominated investment funds have become a popular investment tool, with Luxembourg being at the forefront of product innovation within that field.

Pierre Gramegna, Luxembourg’s Minister of Finance, stated: “The internationalisation of the RMB has evolved rapidly with clearing banks and RQFII quotas being allotted across the world. This process can indeed be considered as the single most important event in the world of currencies since the creation of the euro. By having received its RQFII quota, Luxembourg is reinforcing furthermore its position as major financial RMB offshore centre and is playing more and more a leading role in the internationalisation of the RMB. Luxembourg was the first non-Asian country to be accepted as prospective founding member of the AIIB.”

Facts and figures

Luxembourg ranks first with regard to RMB deposits outside of Asia.

The Luxembourg financial centre has consolidated its number 1 position for RMB-denominated funds (RMB 296 bn) and bonds (45 bonds worth over RMB 34bn). Luxembourg has over 50% of market share of Dim Sum bonds in Europe and is the third largest Dim Sum bond listing centre worldwide.

Six Chinese banks are using their Luxembourg hub for cross-border RMB activities throughout Europe.

In 2014, Luxembourg organised the very first international conference on renminbi business in Europe.