RMB Financial Channels

The internationalisation of the RMB also benefits from the steady expansion of new RMB clearing banks, which provide direct access to RMB liquidity in China, while contributing to the expansion of offshore RMB.

The launch of the Shanghai-Hong Kong Stock Connect – the cross-boundary investment channel that connects the two markets – has boosted the growth of trading volumes, along with Shanghai’s Free Trade Zone (FTZ), which is paving way to new FTZ reforms in other cities.

Despite initial technical challenges and the Chinese stock market correction, the China International Payment System (CIPS) is expected to be introduced in the fall. Scaled down, it will be used only for cross-border yuan trade deals.

There are almost an estimated $500 billion of RMB bilateral currency swaps – agreements between two countries to ensure access to each other’s currency if needed – in China and more than 30 countries.

These efforts are complemented by the launch of the massive “One Belt, One Road” regional initiatives in China’s regional proximity and internationally.

After years of hollow reform pledges by the G7 nations, China is also taking a more proactive role in global finance, through the BRICS New Development Bank and the Asian Infrastructure Investment Bank (AIIB). Despite initial US opposition, the AIIB took off dramatically last spring, especially after the UK joined the bank, which paved the way for other EU economies.

Emergence of RMB Commodity Trading

Intriguingly, the dominant role of the dollar in global commodity pricing evolved in the 1970s when the US dominance began to erode. When America became an energy importer, it grew more reliant on the leading oil producers. As the Middle East’s oil economies opted for the dollar as payment currency, the petrodollar era came to rest on economic and strategic relations (oil for US dollars and military aid).

Until recently, these arrangements have enhanced US geopolitical might in the Middle East, including Washington’s ties with Saudi Arabia. However, as the US shale revolution took off and China’s role as the largest buyer has steadily increased in the region, the old status quo is gradually eroding.

While the dollar still remains the dominant currency for most commodities, China’s role in international commodity trade has increased dramatically. It is the largest consumer of iron ore, zinc, lead and copper. In the coming years, increasing share of commodity trade is likely to be priced in RMB, as evidenced by the emergence of RMB-denominated contracts on exchanges in Chinese cities.

As the world’s largest consumer and producer of gold, China also hopes to play a role in determining gold prices. Only three years ago, Hong Kong Exchanges and Clearing bought the London Metals Exchange, while Shanghai is about to launch an RMB-denominated gold-index.

In the future, commodity prices are likely to gravitate toward the RMB and other large emerging-economy currencies.