- China officially started a pilot program allowing companies in selected regions to settle cross-border trade in renminbi.
- Settling trade in renminbi can help Chinese companies cut foreign exchange transaction costs and reduce exchange rate volatility risks.
- The renminbi will likely be more widely used for trade, especially in the Asian region, but the renminbi is still very far from supplanting the US dollar.
Pilot studies can help evaluate an experiment's potential success without committing too much time and money. For example, over the years TV pilots resulted in the airing of exceptional entertainment (Gilligan's Island, Friends, and Lost to name a few) while weeding out waste-of-time programs (e.g., Poochinski—a comedy featuring a cop reincarnated as a talking, crime-fighting bulldog). Successful pilots have launched actors and actresses into stratospheric status. Recently China, in its own pilot program, is promoting what it's hoping to be a new rising star, its currency.
It's obvious China sees star potential in the renminbi. In recent months, China started allowing several central banks to settle payments with the People's Bank of China in renminbi while arguing against the US dollar's global dominance. Monday, China took another step to showcase its currency—allowing approved companies in selected neighboring regions to settle cross-border trade in renminbi.
This is a new role for the largely sheltered renminbi. Almost all Chinese trade is settled in US dollars (and euros and yen to a much smaller extent), and authorities strictly regulate the amounts of renminbi leaving Chinese borders. Now, China's pilot program will allow select companies to settle and invoice transactions through mainland Chinese banks in renminbi and foreign banks to buy or borrow renminbi to settle trade deals abroad. China reasons this program can help Chinese companies cut foreign exchange transaction costs and reduce exchange rate volatility risks.
So far, the experiment is small—the first batch of deals on Monday amounted to just 14 million renminbi ($2 million) between six Shanghai companies and their counterparts in Hong Kong and Indonesia. But the pilot's already touted as having wider potential.
Does this mean using renminbi as global trade currency, rather than dollars, will become de rigueur? Not likely any time soon. China's move is an extremely small step, and there's every belief wide use of renminbi as trade currency will take years, if not decades. The renminbi is still pegged to a basket of currencies (mostly dollars) and is not fully convertible. It's doubtful the Chinese government will suddenly strip these protective walls away from its currency. The pilot program even has strict rules to ensure China's capital controls are not violated and require documentation and coordination with Chinese customs officials.
Promoting the renminbi these days isn't hard, especially in the wake of tarnished Western stars. But the renminbi is still very far from supplanting the US dollar. The renminbi will likely be more widely used for trade, especially in the Asian region, but it's a stretch to say it'll serve as the new global trade currency anytime soon, much less as a reserve currency. Though China's economy is still posting growth as Western nations languish, its economy still lacks the track record necessary to underpin a dominant currency, and its heavy state presence means it's subject to far more political risks.
The world may be enamored with the idea of a new global currency, but only time will tell if China's pilot program proves more Friends than Poochinski.