By Peter Garnham

China has kick-started a major plan to internationalise the renminbi and the process is likely to be faster than many expect, according to HSBC. If successful, this could lead to nearly $2,000bn in annual trade flows, or as much as 50 percent of China’s total, being settled in renminbi each year by 2012, compared with less than 10 percent today.

The move follows calls by China for the world to adopt a supranational currency to replace the dollar. “China is beginning an ambitious scheme to raise the role of the renminbi in international trade and finance and to reduce reliance on the US dollar,” said Qu Hongbin, China chief economist at HSBC.

“This will likely be a multi-year and gradual process. Yet, we believe the pace is likely to be faster than many expect.” HSBC said the internationalisation of the renminbi was long overdue, given China’s rising economic power relative to the limited use of the renminbi overseas.

The bank estimated that Chinese gross domestic product could hit $4,700bn this year, implying it could overtake Japan as the world’s second-largest economy in 2010, while it was likely to overtake Germany as the world’s second-largest trading country by the end of the year.

China announced a pilot programme last week that expanded renminbi settlement agreements between Hong Kong and five major trading cities, including Guangzhou and Shanghai. Furthermore, this year the People’s Bank of China has signed a total of Rmb650bn ($95bn) in bilateral currency swap agreements with six central banks: South Korea, Hong Kong, Malaysia, Indonesia, Belarus and Argentina.

HSBC said China was still in talks with other central banks to form additional swap agreements and was likely to expand them to cover all the country’s trade with Asia, excluding Japan. This would be followed by an expansion to take in other emerging countries, including those in the Middle East and Latin America, that needed renminbi to pay for their imports of Chinese manufactured goods.

“More than half of China’s total trade flows, primarily bilateral trade with emerging market countries, are likely to be settled in renminbi in the next three to five years,” said Mr Qu. “This means that nearly $2,000bn worth of cross-border trade flows would be settled in renminbi, making it one of the top three currencies used in global trade.”

Pound gains ground

The pound gained ground yesterday as rising equity markets boosted investor confidence and UK economic data came in stronger than expected. A survey from the Royal Institution of Chartered Surveyors added to evidence that UK house prices were beginning to stabilise.

The Rics house price balance jumped from -43.8 in May to 18.1 in June, hitting its highest level since September 2007.

It was the largest one-month gain since the series bottomed in April 2008. Figures from the British Retail Consortium showed that sales rose at an annual rate of 3.2 per cent last month following a rise of just 0.8 per cent in May.

Optimism over the corporate earnings season also boosted the pound as expectation-beating figures from Goldman Sachs, the US bank, weighed on haven demand for the dollar and the yen and lifted equities.

Comments from Tim Geithner, US Treasury secretary, suggesting that the global recession could be over in a matter of months also lifted risk appetite. The pound was supported after Adam Posen, in testimony to the UK parliament ahead of his appointment to the Bank of England’s monetary policy committee, said sterling should appreciate against the euro in the medium term. By midday in New York, the pound rose 0.5 percent to $1.6305 against the dollar and climbed 0.5 percent to £0.8574 against the euro.

Commodity-linked currencies advanced as investor optimism was boosted by the first rise in Australian business sentiment in 19 months and comments from Alan Bollard, governor of the Reserve Bank of New Zealand, that the country might recover sooner than its trading partners. Analysts said strong second-quarter growth from regional bellwether Singapore raised hope for rising demand in the rest of Asia.

The dollar fell 0.8 per cent to $0.7895 against the Australian dollar, lost 1 per cent to C$1.1390 against the Canadian dollar and eased 0.4 per cent to $0.6356 against the New Zealand dollar. The euro was flat at $1.3981 against the dollar after the ZEW survey of German investor confidence unexpectedly fell in July after eight increases.

Jennifer McKeown at Capital Economics said the news was a further sign that the eurozone was emerging from recession only gradually. “It still looks as though any recovery in eurozone activity will be slow to get started,” she said. The dollar edged 0.1 percent lower to Y92.87 against the yen. Emerging market currencies benefited from rising risk appetite. The South Korean won rose 1.1 percent to Won1,294.20 against the dollar and the South African rand climbed 0.6 percent to R8.2690.