2020 was a banner year for Chinese markets
and the Chinese currency.
Foreign investors poured billions
into renminbi-denominated stocks and bonds.
That's good news for Beijing.
It strengthens its position as a global financial power
and advances one of its main long-term goals:
for the renminbi to finally step out of the dollar's shadow
and become a global reserve currency in its own right.
But achieving equal status to the dollar
will require a change of mentality
in Beijing, where there is a culture of hoarding power.
For the renminbi to really match the prestige of the dollar
they will have to break that instinct and give up control.
The dollar has dominated international finance
for decades.
And America has enjoyed the so-called exorbitant privilege
that comes with that.
Because it always pays in its own currency
the US can't really run out of cash.
In the simplest terms, global demand for dollars
means the country can always print more
without a huge impact.
That's a key reason why America can run an enormous deficit
without fear of default.
US companies also benefit from not
having to worry about exchange rate risk since everything is
priced in their home currency.
Trade, commodities, finance, pretty much everything
that matters in the global economy,
and areas in which China wants a bigger say,
is priced in dollars.
But while China has started to rival
the US in international affairs, the renminbi
isn't even close to having the pull of the dollar yet.
China is making headway in raising the renminbi status
by opening up its stock and bond markets to foreign investors.
China's economic recovery from the Covid-19 pandemic
has sent its stock market soaring
and buoyed yields on onshore bonds,
drawing in well over $100bn from overseas investors searching
for profits.
However, while its capital markets may accept foreign
money, they do so primarily through cross-border exchange
programmes that link Chinese onshore stock and bond markets
to those in Hong Kong.
Those stock and bond connect schemes are specifically
designed to welcome overseas investment while maintaining
a limit on how much of China's currency can flow out.
Investments from overseas can be withdrawn relatively easily.
But Chinese investors are subject to much, much
stricter rules.
As a result, it doesn't matter how much money
China's central bank prints.
Only a tiny fraction can make its way offshore.
And that arrangement helps Beijing
maintain control over the renminbi's exchange rate.
But it also limits how much renminbi other countries
can hoard and therefore the currency's global standard.
Swift data show the renminbi's share
of international transactions languishing at about 2
per cent, still well below its 2015 peak of only 3 per cent.
And Hong Kong, which has its own currency and financial system
but is politically a part of China,
accounts for about three-quarters
of those payments.
This is, at least in part, by design.
Even though China is allowing more foreign cities
to act as clearing centres for the renminbi,
policymakers in Beijing are very reluctant to allow the currency
to accumulate offshore.
And for central banks the dollar's supreme importance
remains a plain fact.
IMF data show them holding on to about $230bn
worth of renminbi assets in their forex reserves
compared to almost $7tn in US dollars.
Five years ago, Beijing appeared on track
to rapidly internationalise the renminbi.
But those efforts were complicated by the decision
to maintain a soft peg to the US dollar.
When the greenback surged it took the renminbi along
for the ride, making China's exports
less competitive just as the domestic economy
was losing steam.
That prompted the People's Bank of China
to weaken the renminbi with a one-off devaluation of almost 2
per cent in the summer of 2015.
The stated purpose for the move was market reform,
to allow the renminbi's trading band, which
is set every morning by the central bank,
to take more cues from foreign exchange markets.
But it spooked investors who cashed in their renminbi assets
and sent the currency on a historic route.
Unable to convince investors to stop selling and facing
accusations it was flirting with a currency war,
China imposed strict capital controls
and throttled the renminbi market in Hong Kong
in order to stabilise the currency.
Since 2015, China's foreign exchange policy
has become far more transparent and market driven.
And few traders today live in fear of a devaluation
like the one in 2015.
But the exchange rate is far from free floating.
And, so far, China's capital account
is still far from totally open.
To have a truly global renminbi and all of the advantages
that come with it, Beijing will have
to let the currency go wherever market forces and its citizens
want to take it.
For now at least, that looks like a long way off.