Invesco’s chief economist John Greenwood says Chinese renminbi cannot become an international trading currency until China lifts its foreign exchange controls on outbound and inbound capital transactions.
Greenwood (pictured) says: “China’s great wall of foreign exchange controls seem likely to persist for an extended period of time – years if not decades.
“Abolishing foreign exchange control means, for example, allowing Chinese companies and individuals to hold accounts abroad, or freely remit funds abroad.
“Equally it requires non-resident foreigners to be able to hold accounts in China, or to remit funds to China without prior approval from Chinese bureaucrats. It is interesting to note in this context that no communist country has ever permitted free inflows and outflows of capital.”
Greenwood says the offshore market has grown rapidly in the past two years but is not likely to continue growing at the same pace, and is to be more limited.
He explains: “It therefore follows that these recent moves towards creating an offshore market in RMB or denominating certain bilateral trade transactions in RMB do not amount to any significant threat to the position of the US dollar as the world’s premier international reserve currency.”
Greenwood adds: “The result of the present restrictions is that offshore RMB cannot be loaned for financial investment, for hedging, or other non-trade related purposes.”
The Invesco chief economist says the currency will never become a full international currency, or a reserve currency, until issues are addressed.