A. Background

With a gross domestic product of $10,380 billion in 2014, China has the world’s second-largest economy when measured in U.S. dollars. According to data compiled by the International Monetary Fund (IMF) that adjusts gross domestic product for price differences between countries, in 2014, China surpassed the United States to become the country with the world’s largest economy.

China’s national currency is the RMB. A Bank for International Settlements (BIS) survey of currency trading that occurred in April 2013 indicated that the RMB was the ninth most-traded currency in the world in 2013; the Canadian dollar ranked seventh. Furthermore, according to data compiled between January 2012 and October 2013 by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the RMB surpassed the euro to become the second most-used currency in financing global trade. Moreover, as reported by the IMF, some central banks have begun holding the RMB in their international reserves. Figure 1 shows the percentage of global foreign exchange trade, such as currency exchange transactions and financial contracts, involving the RMB that were reported to the BIS for various years since 1998.

Figure 1 – Renminbi as a Percentage of the Volume of Global Foreign Exchange Trade, Various Years, 1998–2013

Source: Figure prepared based on information from: Bank for International Settlements, Triennial Central Bank Survey – Foreign exchange turnover in April 2013: preliminary global results, September 2013.

Data compiled by SWIFT on international financial transfers between private sector banks indicate that, since November 2014, the RMB has been the fourth most-used currency for transfers, and has surpassed the Canadian and Australian dollars in terms of the total amount of those transfers.

The People’s Bank of China (PBoC) controls the daily exchange rate between the RMB and other currencies, with this rate based on two factors: the supply of, and demand for, the RMB; and the RMB’s value in relation to that of a group of currencies. At the July 2013 meeting of the U.S.–China Strategic and Economic Dialogue, China pledged to continue taking steps to enable the market to play a fundamental role in determining the exchange rate between the U.S. dollar and the RMB. In March 2014, the PBoC announced an increase – from ±1% to ±2% – in the permitted daily change in the value of the RMB relative to the U.S. dollar.

The Chinese government controls the cross-border flow of the RMB through, for example, limiting the ability of offshore firms to purchase RMB-denominated bonds and the amount of RMB that mainland Chinese can transfer offshore; it does not control the transfer of RMB-denominated financial instruments or the transfer of RMB between entities located outside of mainland China. According to a BIS report, because of the Chinese government’s control of the cross-border flow of the RMB, the exchange rate between the RMB and other currencies when the RMB is converted on mainland China is different than the rate when the conversion occurs offshore.

B. Witnesses’ Views

The Department of Finance told the Committee that international use of the RMB as a currency for trade and investment will depend on three factors: an end to the Chinese government’s control on cross-border flows of the RMB; flexibility in China’s exchange rate regime; and demand for the RMB and RMB-denominated financial instruments. It pointed out that, as China does not restrict the RMB’s use in trade, the country does not regulate all aspects of its use.

As well, BMO Capital Markets noted that the PBoC continues to monitor and manage the RMB’s exchange rate through two government entities: the State Administration of Foreign Exchange; and the China Foreign Exchange Trade System. The Industrial and Commercial Bank of China said that, within three or four years, China will remove its restrictions on the transfer of the RMB to and from mainland China, and that Canada must act quickly to realize the benefits of the RMB hub before the restrictions are removed. Regarding demand for the RMB, BMO Capital Markets suggested that high Chinese demand for certain commodities could lead to these goods being valued in the RMB rather than in the U.S. dollar in the future; in that case, demand for the RMB would rise.

According to the China Construction Bank, the PBoC is developing a new system for clearing and settling RMB payments; the system, which is expected to be launched in 2016, will reduce the amount of time required to clear and settle offshore RMB transactions. It noted that, with the new system, a third-party intermediary – such as a Chinese-resident bank – will not be needed for clearing and settlement purposes.