International use of the Chinese renminbi is expected to surge in the next five to 10 years given the need for financing by the Chinese government of infrastructure projects under its One Belt One Road (OBOR) programme, a banking executive says.
Introduced by the Xi Jinping administration in 2013, OBOR is an ambitious development plan to revive the ancient Silk Road routes for land and maritime trade. It strives to connect 65 countries in Asia, Europe and Africa altogether making up 63% of world population and 30% of global gross domestic product, according to HSBC.
Although the renminbi is not yet fully convertible as Chinese authorities still use a fixed exchange-rate regime and limit free movement of capital, those barriers can be overcome by trading in major offshore renminbi markets, such as Hong Kong, London and Singapore, which would allow full convertibility of the currency, said George Leung, an adviser to the bank's Asia Pacific CEO.
"As the Belt and Road initiative continues to evolve and gets bigger and bigger, and because of the financing needs, using the renminbi [to finance] various projects, then the offshore renminbi markets will grow even more," he said in an interview with Asia Focus.
"In that sense, you do not have to worry about the non-convertibility of the renminbi because you can fund with offshore renminbi that is fully convertible. So [the offshore renminbi markets] are as good as those other fully convertible currencies in the world," said Mr Leung.
He also believes renminbi traded in the onshore market could become convertible sooner than anyone expects, as increased activity in offshore renminbi markets provides the incentive.
"I am not totally concerned by the inconvertibility of the renminbi because so long as the offshore renminbi markets can develop further and [grow] bigger, people can make use of the products offered by these offshore markets to do funding or hedging for their own investments."
The renminbi's growing status as one of the most traded currencies has been unprecedented. The establishment, promoted by Beijing, of the "dim sum" bond market in 2009 and expansion of cross-border renminbi trade settlement via a pilot project helped develop pools of offshore renminbi liquidity.
"Not long ago the renminbi was not used internationally, it was just a domestic currency. But within 10 to 15 years, it has already been included in the special drawing rights (SDR)," said Mr Leung, referring to the pool of international currencies overseen by the International Monetary Fund (IMF).
"I would say the renminbi will be more widely recognised as an international currency after five to 10 years," he said, noting that the renminbi could emerge as one of the four most used currencies in the world after the US dollar, the euro and the British pound.
The renminbi ranked eighth for over-the-counter foreign exchange turnover in April this year, accounting for 4% of total foreign-exchange turnover globally, according to the triennial central bank survey by the Bank for International Settlements.
The IMF on Oct 1 added the renminbi to the basket of currencies that make up the SDR, saying it met the criteria based on exports and free usage. The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves.
Besides fostering infrastructure development and facilitating trade and investment flows, OBOR also aims to act as a link for intercontinental e-commerce. Well-connected infrastructure can act as a conduit for efficient telecommunication networks, which in turn allows e-commerce to flourish.
"You need to put in place the road network, high-speed railway network, the ports, and everything else. At the same time, you also need to put in place a very strong communication network along all these routes," said Mr Leung. "By developing a better communication network among the countries on the Belt and Road routes, there will be better connectivity by telecommunication. Then you can develop internet businesses."
China itself is a prime example of how e-commerce development has flourished, he said. "People may say China was an underdeveloped market [for e-commerce] 10 to 15 years ago. But now China is well-connected by the internet and has become the largest e-commerce market in the world," said Mr Leung.
Transactions in China's online retail market totalled US$630 billion last year, according to a McKinsey survey of internet users. E-commerce in China accounts for 13.5% of all retail spending. The survey also shows that nearly everyone in high-tier cities is online, making up 83% of people aged 13 and older. Among those internet users, 89% do their shopping online.
"E-commerce is actually a very strong element hooking up markets along the Belt and Road initiative. Do not overlook e-commerce. It is a big business in the future for all these new markets," Mr Leung added.