World must prepare to accept renminbi as a global currency
Anita Fung says the markets have spoken - with preparations for the internationalisation of the Chinese currency surging ahead, the day for its recognition may come sooner rather than later
China has made extraordinary strides towards internationalising the renminbi, and it is now time the international community recognises that the global economic architecture needs to evolve to keep pace with the changes.
While the world has been focusing on Europe's woes and America's new stimulus programme, the renminbi quietly passed another key milestone on its path towards becoming a global currency. Last July, the yield spread between five-year onshore Chinese government bonds and those traded on overseas exchanges narrowed to just 9 basis points. A year earlier, the spread stood at almost 300 points.
The higher price paid by onshore borrowers last year reflected the frictional costs created by Chinese controls. The convergence of the bond yield is an unequivocal vote of confidence in Beijing's programme of currency normalisation.
The disappearance of the yield spread, and the broadly shared agreement that the renminbi has reached market equilibrium with the US dollar, are clear indications that the walls that have sequestered the Chinese currency from the global economy are crumbling fast.
The Chinese government has made substantial progress on all the three key steps to full convertibility of the renminbi: deepening and liberalising the local capital markets; relaxing restrictions on the exchange rate; and allowing the markets greater say in setting interest rates.
The Qualified Foreign Institutional Investor programme, which gives foreigners direct access to China's capital markets, has been expanded by US$7.3 billion so far this year to US$29.8 illion; the onshore interbank market is being liberalised; interest rates have been allowed to float 10 per cent above and 30 per cent below the rate set by the People's Bank of China; and the daily amount which the renminbi can fluctuate has been doubled to 2 per cent.
