Signs of the growing international presence of the Chinese renminbi (RMB) have fueled speculation that the yuan will be the world’s next reserve currency. The Chinese economic miracle has catapulted the RMB to a spot among the top 10 traded currencies in the global economy, thanks to high GDP growth, consecutive current and capital account surpluses and an aggressive People’s Bank of China (PBoC) policy since 2009, a time when China found itself in the “dollar trap.”
However, the yuan’s rapid offshore growth, driven by increased trade settlement, offshore deposits, central bank currency swaps, and issuances of RMB-denominated bonds, may be a function of investor speculation, not organic acceptance of China’s economic weight in the international economy. Unless offshore RMB use becomes more international and less driven by speculation, it could threaten China’s internationalization timetable.
It has long been thought that the RMB is undervalued due to the PBoC’s policy of promoting the export-dependent tradable goods sector. By accumulating nearly $4 trillion in foreign exchange reserves through a “twin surplus” (current and capital account surpluses), China has been able to suppress the RMB’s value through sterilization. Foreign investors have relished the opportunity to invest in the RMB since 2005, when China unpegged the currency from the dollar, seeing appreciation as a certainty. If investors hold RMB or RMB-denominated assets, they can anticipate translation gains when converting those assets back into their local currencies. As of April 2014, the RMB had appreciated 34 percent versus the dollar since it was unpegged.