Cart before the horse

It is one of those days when a single story drowns out all others. Given that there is no shortage of reporting on the 20th anniversary of the Tiananmen massacre on any major news outlet you care to mention, today we will stick to business. In particular, the renminbi. Standard Chartered became the first foreign bank to announce plans to issue renminbi-denominated bonds in mainland China, just pipping rival HSBC. For both banks, this is primarily an exercise in financial market development. Standard Chartered CEO Peter Sands said the bond issue is expected to help raise the profile of the renminbi as an international reserve currency and develop local capital markets as well as contribute towards Shanghai’s development as a global financial center. Does he have these events in the correct order, though? It seems we are once again in danger of succumbing to a renminbi-as-global-reserve-currency hype-fest. Yes, China is oiling the wheels of global trade by establishing renminbi swaps with other a number of countries. And yes, China is keen to allow trade settlements in renminbi (it appears Malaysia is the latest country to consider shifting away from the US dollar towards a renminbi-ringgit settlement system). And yes, allowing foreign banks to issue local currency bonds is a reasonably significant step in the development of China’s financial markets. But hold your horses. Let’s rationalize and reorganize Mr Sands’ chain of events as follows: China develops its capital markets; [insert ‘China significantly liberalizes renminbi trade and investment’]; Shanghai becomes a global financial center; and – finally, and not even certainly – the renminbi becomes a bone fide international reserve currency. Rome (and Shanghai, it seems) was not built in a day.