On August 11, the People’s Bank of China (PBOC) adjusted the exchange-rate of the Chinese renminbi (RMB) against the US dollar to better reflect market conditions. The net effect was a devaluation of 1.9% relative to the dollar.

The adjustment was an effort to comply with the requirements of the International Monetary Fund (IMF) to include the yuan in the reserve currency basket. The move towards a more market-determined rate is what the IMF and the US Treasury, along with European financial authorities, have been asking for.

It is well-aligned with Beijing’s effort to speed up the RMB internationalisation.

The Renminbi Goes International

Today, China is the world’s biggest exporter and the second-largest economy in the world in absolute terms. At the end of last year, the RMB moved into the fifth position in global payments, but still accounts barely over 2% of the international payments total. However, its explosive potential is reflected by its rise as a settlement currency for China’s global trade to 23% by early 2015.

Until the global financial crisis, the RMB had little exposure to international markets because of government controls that prohibited almost all exports of the currency, or its use in international transactions. In the era of Xi Jinping and Li Keqiang, China is rebalancing toward consumption and innovation, and Beijing is fostering the RMB’s rise in international finance.

After China joined the World Trade Organization (WTO) in 2001 and exports truly took off, the RMB has evolved as an international currency for paying for goods and services. In this era – roughly the 2000s until the global crisis – foreign multinationals invested in China, but Chinese foreign investment was minimal.

In the second stage – the first half of the 2010s – China consolidated its role as the world’s trading engine. As Chinese capital is increasingly going out, leading Chinese brands – from ICT (Lenovo, Huawei, Tencent, Alibaba, China Mobile) to financial institutions (ICBC, China Construction Bank, Agricultural Bank of China, Bank of China) to oil and gas (Sinopec, PetroChina) – are becoming familiar abroad and the RMB’s role is expanding as a currency for global investment. Concurrently, the number of Chinese traveling overseas has soared to 117 million.

In the third stage, the RMB seeks to achieve a new status as a reserve currency with sovereign governments. That’s where we are today. The transition will not occur without friction. All major international currencies – the US dollar, Euro, British sterling and Japanese yen – have experienced their share of growth pains.

The summer turmoil in the Chinese equity markets reflects these transitional challenges. In early 2013, I predicted the impending boom in the Chinese markets. In mid-June, that boom resulted in a severe correction. Despite volatility, the potential of Chinese market prevails.