The Renminbi Is the Future

08/03/2010 2:33 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The renminbi is coming. The renminbi is coming.

At this pace, it may take a decade or more, but slow changes in China’s currency policy are paving the way for a challenge to the US dollar.

Eventually.

On July 28, Chinese regulators lifted restrictions on the flow of the renminbi in Hong Kong. (For the record, the name of China’s currency is “renminbi” and the name for the units of that currency is “yuan,” as in 100 yuan. Currently one dollar is equal to 6.775 yuan.)

Any company in the world can now open a renminbi bank account in Hong Kong and exchange the currency freely. Any kind of company can now receive a renminbi loan. Banks in Hong Kong can now create investment products denominated in the currency.

This step follows two other moves in June, the first cutting the currency’s peg to the US dollar and the second expanding the program that lets Chinese companies use the renminbi to settle cross-border trades. (All this is playing out against a backdrop of a bad-loan crisis in China’s banking system. For more on that, see this post.)

Of the most recent moves, allowing companies to open renminbi bank accounts is the most important in the short run. Under the old rules, foreign companies that made a renminbi profit in China often found themselves unable to either take the profit home or invest it in China. Now, companies will be able to invest their renminbi holdings through accounts in Hong Kong.

In the long run, though, it’s the direction that matters. All the moves in July and June inch the renminbi a little closer to a global currency. As long as holders of yuan can’t move them freely across borders or exchange them for other currencies when and where they please, or settle trades in renminbi, then China’s currency isn’t ready for a global role.

Beijing hasn’t removed all restrictions on the movement of its currency. Hong Kong banks, for example, can clear their open renminbi positions only with the Bank of China if the transactions are related to trade. The volume of cross-border trade in renminbi is up about 20 times in the first half of 2010 over the same period of 2009, but that still amounts to just 70.6 billion yuan (or about $10.4 billion.)

That’s not enough to make the renminbi a serious global currency now, but the momentum points in that direction.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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