Renminbi to increase global trade role A few months ago, Fortescue Metals placed a $100m order in China for railway cars to transport iron ore from its Australian mines - except that the order was in renminbi, at the request of the Chinese exporter. Fortescue then turned to Australian bank ANZ to provide a hedge to protect against adverse currency moves between the Chinese currency and the Australian dollar. Because the Aussie dollar moves less against the renminbi than it does against the US dollar, the hedge was cheaper than if the sale was in greenbacks. In Hong Kong, foreign banks such as ANZ are receiving calls from the big mainland banks asking them to refinance their Chinese renminbi trade books. That is a challenge for most foreign banks, given that they generally lack the renminbi funding that would enable them to easily enter into such transactions. But that was precisely the point of such requests. Beijing wants to see the renminbi play a bigger role in trade and these requests are meant to get the flow going. By agreeing to such transactions, foreign banks will have to increase their funding capabilities in renminbi, which will lead them in turn to seek renminbi deposits. And once they have those deposits, it will become easier for the banks to lend renminbi to their corporate clients in Asia and around the world and help their customers manage their currency risk. Beijing's desire to promote the renminbi comes at a fortuitous time. There is a dollar shortage in Asia, which threatens to restrict credit growth in the region. The shortage is partly related to Basel capital requirements. But there are also big new trends that are influencing both the supply of dollars and the cost of accessing those dollars. In the past, US dollar holders would recirculate dollars by putting them into the interbank market. But today the biggest holders of greenbacks are Asian central banks. And they are putting their dollars into US Treasuries rather than into the market. Moreover, there are new players in the markets in Asia whose huge appetite for US dollars is also contributing to the shortage. When the mainland tightened credit last year, Chinese banks began lending dollars to cash-strapped enterprises offshore in Hong Kong and elsewhere. In addition, as Singaporean and Malaysian banks outgrow their home markets, they too are looking to lend dollars. At the same time, both corporate treasurers and local investors in Asia continue to ply the carry trade, borrowing in low yielding currencies such as the dollar to invest in higher-yielding local currencies. Given the dollar shortage, anything that reduces demand for dollars has to be a good thing. The euro today looks like an alternative that isn't very credible. Japan may be considered a haven today, but the Japanese yen has never been a contender for status as a serious reserve currency. Today renminbi-denominated transactions are a small part of total global trade, but the number of such transactions is growing and the rate of growth is accelerating, with the explicit approval of the Chinese government. Last autumn, the People's Bank of China said it would like to see precisely 10 per cent of China's trade denominated in the local currency. Today it may be over 12 per cent. Chinese banks are a huge source of liquidity for the whole region. They are, for example, financing many of the big infrastructure projects from India and Indonesia to the Philippines and Sri Lanka. Project finance specialists say it will be a matter of time before many of those projects are denominated in the Chinese currency. Many bankers expect capital controls in China will be lifted as early as 2015. ANZ expects the renminbi to be the second largest currency for global trade by that time. Both lending in renminbi and investment in renminbi will swiftly follow. Yet there are significant challenges facing China. Some analysts say that China may post its first balance of payments deficit since 1992 this quarter. Banks are beginning to face liquidity and funding challenges. If capital flight, which seems to be increasing following the scandals in Chongqing, becomes a serious issue, the ambitious timetable for reforms such as lifting capital controls would likely be extended, possibly for years. Sceptics say that the efforts to get foreigners to hold renminbi come precisely at the time the currency is no longer appreciating. Indeed, it now trades below where the PBoC officially fixes the rate. But even most sceptics expect the renminbi to gain in value in the long term. The same cannot be said of the prospects for the US dollar (though at the moment it looks attractive on a relative basis). The renminbi seems by far the likeliest candidate to at least challenge it, tomorrow if not today.