China: a mega power with a mini coin

For years, China has been pulling out all the stops to overtake the United States as the world's largest economy. Chinese power is also increasing in the field of international politics and technology. In the currency world, however, the renminbi has been condemned to a role on the margins.

After weeks of bad economic news, there was finally some positive news a few days ago. More than 2 million cars were sold in China in April. That is an increase of 4% compared to the same month of 2019. It is no coincidence that the economic windfall comes from China. The country was the first to be hit by the corona outbreak. Due to the strict measures that were taken there quickly, the Chinese economy was able to get going again fairly smoothly. In addition, the underlying growth in the country has been considerable for many years.

Mega power on the rise
Even a trade war with the United States and the corona outbreak cannot prevent China's influence from increasing significantly in many respects. Just think of economics, politics and technology. However, the currency world is a notable exception. The renminbi hardly plays a significant role there.

The currency's share in global currency trading is only 4,3% according to research by the BIS and the IMF. Actually, that picture is still too positive, because there is double counting because 2 currencies are involved in every transaction. The dollar's trading share therefore comes to 88,3% and for the euro it is 32,3%.

Role of meaning
A few years ago, it looked as though the renminbi was indeed going to play a significant role on the world stage. In 2016, the currency was still included in the IMF's Special Drawing Rights. This is mainly a symbolic move, as the importance of this currency basket has been greatly diluted when the fixed exchange rate system was abandoned.

What is still stuck is the renminbi itself. The Chinese government only allows the currency to move around the US dollar in a narrow range. President Xi Jinping wants nothing more than to cut the link with the dollar. But that means the renminbi becomes the plaything of international trade flows, speculators and other forces.

The shadow of the currency world
Jinping is not waiting for that. China is well on its way to opening up equity and bond markets more and more to foreign capital. A fluctuating currency can deter large foreign investors. In addition, the United States is by far the most important trading partner.

Although the country is switching from an export economy to a model based on internal consumption, it is nice if export companies and foreign importers can count on a fairly stable currency. Although China yearns for an independent and strong currency, the renminbi is for now condemned to a role in the shadow of the currency world.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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