The year to appreciate a digital RMB

With the People’s Bank of China (PBoC) now clearly driving its rapid digitization, reports of the demise of China's currency - the RMB - in 2017 have been greatly exaggerated.

In an interview last week with China Securities Journal, PBoC director of tech, Li Wei, confirmed the central bank is not only live-trialing blockchain platform technology, but has officially launched its own digital currency research institute and is determined not to allow ebbs in the flow of the Chinese currency to impact the fast-tracking of China’s fintech future.

“As China emerges to become a global leader in financial technology (fintech), the digitisation of the RMB could not only upgrade domestic and cross-border RMB payment systems, but also significantly accelerate internationalisation of the RMB,” King & Wood Mallesons' (KWM) senior associate Andrew Fei, said in a note to clients yesterday.

Significantly, in late 2016, it was reported that the PBoC successfully completed the trial of a blockchain-based trading platform for digital bank acceptance bills. According to KWM, the issuance and settlement of a digital currency issued by the PBOC were also tested on this platform.

The PBoC’s digital legal tender prototype system – “Demo” – could also be launched as soon as this year.


Prudent financial management


Any legitimization of the RMB as a breakthrough digital currency would be a win for the value of international RMB payments, which, according to SWIFT, decreased by as much as 29.5 per cent in 2016.

The Chinese currency's share as an international payments currency also dropped from 2.31 per cent in December 2015 to 1.68 per cent in December last year, a clear blow to the PBoC's currency internationalization efforts.

However, Kumar Shah, head of global markets corporate services at HSBC Australia, told AB+F that the Chinese authorities were continuing to exercise exacting prudence.

“In the short term, it is understandable that China may have to increase its focus on certain types of capital flows for the benefit of the broader economy,” he said.

“This is prudent financial management. However, we think China’s 'going out' policy will continue to play an important part in supporting its economic transition through investment in high quality technology, know-how and brands around the world."

Shah added that China has made “significant progress” with the creation and execution of a variety of financial reforms and in the challenges of integrating and internationalising the RMB.

“This is a long term structural trend that will continue to change the global economic and financial landscape,” he said.

The RMB was the fifth-most-used currency worldwide in 2015, before being overtaken by the Canadian dollar last year.


Volatility of the yuan


Michael Moon, head of SWIFT’s Asia-Pacific payments markets department, said a “convergence” of factors contributed to the RMB’s crash - from China’s domestic slowdown to the volatility of the yuan exchange rate and regulatory measures on capital outflows.

The pressure on the yuan exchange rate has eased slightly in recent weeks as the impact of a US interest rate rise and US President Donald Trump’s fiscal expansion plan have dragged down dollar strength.

“Most global currencies have weakened against the US dollar recently,” Shah said. “The RMB has actually been very stable in relation to the currencies of China’s major trading partners such as the CFETS (China Foreign Exchange Trade System) RMB Index.”

Starting last month, the number of currencies in the CFETS basket was increased to 24 from 13, to make the basket more representative.

The Chinese government already has a blockchain consortium in place (ChinaLedger), with the PBoC likely to work hand in glove with any major industry players (think Alibaba) to ensure it at least has a hand on the wheel when R&D is generated through its digital currency research interests.

Last week Wei told the CSJ that the central bank is interested in the ability of blockchain technology to settle real-time transactions in a “secure, cheap and efficient ecosystem of peer-to-peer users”.

Categories
Asian Markets, Technology,
Tags:
RMB, HSBC, KWM
Author:
Christian Edwards, cedwards@financialpublications.com.au
Article Posted:
February 07, 2017

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