Since the central bank launched the RMB settlement pilot of cross-border trade in 2009, RMB internationalization has gone through a decade process, which is also a process of rapid growth of China’s economic scale, continuous improvement of Global trade share and continuous deepening of financial market opening. With the continuous consolidation of the economic, market and value foundation of currency internationalization, the internationalization of RMB has also made great progress in the past decade. The payment and settlement function of RMB has been continuously enhanced, the investment and financing function has been continuously deepened, and the reserve currency function has gradually emerged. However, with the emergence of trade frictions between China and the United States and the rise of new technologies such as digital currency, the internationalization of RMB also faces some new challenges in the new era.
One belt, one road ahead and the free trade zone will continue to develop. These will bring new opportunities for the internationalization of RMB, and the internationalization of China’s RMB will show a new trend. The internationalization process will also be more stable and sustainable.
Ten year achievements of RMB internationalization
With the steady growth of China’s economy, the continuous deepening of reform and opening up in the financial field and the in-depth promotion of the market-oriented reform of RMB exchange rate, the internationalization of RMB has also developed rapidly. Specifically:
First, cross-border trade payment and settlement grew rapidly. The amount of cross-border trade RMB settlement business increased from 506.3 billion yuan in 2010 to 5110 billion yuan in 2018, with an average annual growth rate of 33.5%. Among them, the proportion of cross-border RMB settlement of service trade in the import and export of service trade increased from 17% in January 2015 to 37% in September 2019. According to the data disclosed by the people’s Bank of China, 242 countries and regions have cross-border RMB business with China, more than 349000 enterprises and more than 386 banks. With the rapid growth of RMB settlement in cross-border trade, the market share of RMB international payment continues to increase. According to swift (Global Interbank Financial Telecommunication Association), the market share of RMB international payment increased from 0.3% in 2012 to 1.95% in September 2019.
Second, cross-border investment and financing grew rapidly, and overseas entities continued to increase their holdings of RMB assets. In the first 10 months of 2019, the settlement amount of RMB direct investment totaled 2.2 trillion yuan, an increase of more than 10 times over the same period in 2012. By the end of the third quarter of 2019, the scale of domestic RMB financial assets held by overseas institutions and individuals was 5.86 trillion yuan, an increase of 104% over the end of 2013. Among them, it holds 1.77 trillion yuan of domestic stocks, 2.18 trillion yuan of bonds, 0.82 trillion yuan of loans and 1.09 trillion yuan of deposits.
Third, the RMB valuation function has been continuously broken through, and the international reserve function has gradually become prominent. In October 2016, RMB was officially included in the SDR currency basket, accounting for 10.92%, second only to the US dollar and the euro. By the end of the second quarter of 2019, the RMB reserves held by the reporting countries of the survey on the currency composition of official foreign exchange reserves (Cofer) were US $217.64 billion, accounting for 1.97% of the overall allocated foreign exchange reserves, the highest level since the IMF reported the RMB reserve assets in October 2016. According to incomplete statistics, at present, more than 70 central banks or monetary authorities in the world have included RMB in foreign exchange reserves.
Fourth, the infrastructure of cross-border RMB business has been gradually improved, and the opening of financial markets has achieved remarkable results. So far, the people’s Bank of China has established RMB clearing arrangements in 25 countries and regions such as the United States, Germany, France, South Africa, South Korea, Japan and Russia. By the end of June 2019, CIPS (cross border payment system) had 31 direct participants and 847 indirect participants; The actual business covers more than 160 countries and regions around the world.
In addition, relevant financial reforms have been steadily promoted. The pipeline opening-up of Shanghai Hong Kong stock connect, Shenzhen Hong Kong stock connect and bond stock connect has been further promoted, and the interconnection of domestic and foreign financial markets has been steadily promoted. The central parity pricing mechanism of the RMB exchange rate has been continuously improved and remained basically stable on the basis of a reasonable and balanced level. Capital account convertibility was steadily promoted, foreign exchange management of direct investment took the lead in realizing basic convertibility, and convertibility under securities investment made orderly progress.
RMB internationalization will present a new trend
At present and in the future, the global economy is growing at a low rate, and the major developed economies are gradually falling into negative interest rates. China’s economic growth is relatively stable, the return on assets is relatively high, the reform and opening up in the financial field continues to deepen, and the internationalization of RMB will move forward steadily, but it may show some new trends and characteristics.
First, RMB is expected to become one of the key currencies in the world. Under the constraint of “Triffin paradox”, the international monetary system dominated by the US dollar is one of the internal reasons for the instability of the global financial system to a certain extent. As a global currency and the Fed’s monetary policy, the US dollar is mainly domestic, which determines the turmoil and financial crisis in the global financial market. Under the background of the increasing fluctuation of the US dollar exchange rate, countries need to continue to increase other currencies for international trade settlement transactions. With the sustained and stable growth of China’s economy, China is still expected to maintain its position as the largest trading country in goods. In addition, the RMB exchange rate is more stable relative to major currencies. In the future, the demand for RMB payment and settlement in cross-border trade is expected to continue to increase, and the RMB will gradually develop into one of the key currencies in the world.
Two, the “one belt, one road” will further consolidate the foundation of RMB internationalization. First, one belt, one road China will provide new impetus for China’s economic growth, and promote China to upgrade from a trading power to a big investment country, and consolidate the economic foundation of RMB internationalization. Secondly, the “one belt, one road” will help to enhance the depth and breadth of RMB’s domestic and foreign markets and consolidate the market base of RMB internationalization. Finally, the “one belt, one road” will help to enhance the use of RMB in the global investment and financing and foreign exchange reserves, and consolidate the value foundation of RMB internationalization. In 2019, one belt, one road and one country along the border, grew by 9.4% in 1-10 months, accounting for 4.1 percentage points higher than 29.1% in 2013. Up to now, China has established bilateral local currency swap arrangements with more than 20 countries along the line and RMB clearing arrangements with 7 countries.
Third, the offshore market will become an important fulcrum of RMB internationalization. The offshore market has played an important role in the process of the US dollar and Japanese yen moving towards the international currency. With the continuous expansion of cross-border use of RMB, offshore RMB products have gradually increased, and the offshore RMB market has developed rapidly. At present, a multi-point development pattern has been formed, mainly in Hong Kong, China, and in Singapore, London and Seoul. The people’s Bank of China has established 25 overseas clearing banks in Hongkong, China, Macao, China, Taiwan, Chinese, Singapore, London, Frankfurt, Seoul, Paris, Sydney and New York.
Fourth, the free trade zone and Shanghai international financial center will become the cutting-edge platform for RMB internationalization. China’s free trade zones have blossomed from the coast to the mainland. At present, the number of free trade zones has reached 18. The free trade zone is the forefront of China’s opening to the outside world. A more open and convenient cross-border financial policy in the free trade zone will help to expand the cross-border use of RMB. The construction of Shanghai international financial center is progressing steadily and will become a model for the construction of global asset management, cross-border investment and financing services, international insurance, global RMB asset pricing, payment and clearing center, financial risk management and stress testing. The construction of Shanghai international financial center will promote each other with the internationalization of RMB.
Fifth, the RMB pricing of bulk commodities will be a new driving force for the internationalization of RMB. As the world’s largest importer of crude oil and natural gas, the development of commodity trading and futures market will be promoted rapidly, which will inevitably enhance the pricing power of Chinese factors on global commodity trading. As an international currency for bulk commodities, RMB not only helps to reduce the exchange rate fluctuation risk faced by PetroChina (6.070, – 0.16, – 2.57%) users, but also helps to cultivate the real demand for long-term holding of RMB overseas. At the same time, once the global commodity transaction pricing currency is formed, it has strong institutional inertia and network characteristics, which helps to make RMB become an international payment, settlement and pricing currency faster.
Sixth, the market-oriented reform of RMB exchange rate and financial reform and opening up will complement the internationalization of RMB. With the continuous improvement of the RMB exchange rate formation mechanism and the further promotion of the marketization of the RMB exchange rate, the RMB exchange rate will show a two-way fluctuation, rising and falling trend, which will help to divide market expectations and promote the basic stability of the RMB exchange rate at a reasonable and balanced level. Recently, the office of the financial stability and Development Commission of the State Council announced 11 latest financial industry opening-up measures, and China’s all-round financial industry opening-up has reached a new level, which will lay a market foundation for the internationalization of RMB.
Seventh, the internationalization of RMB will pay more attention to balanced development. So far, the internationalization of RMB is mainly to promote RMB going out through trade settlement. Because overseas residents and institutions hold RMB assets, it is a “debt” internationalization of RMB for China. This initial RMB internationalization model is highly dependent on the expectation of RMB appreciation and is difficult to sustain in the long run. Under the background of China’s increasing economic strength, the demand for foreign investment of Chinese enterprises is increasing, overseas financing has become easier, and the scale of transnational investment and financing will grow rapidly. Therefore, the RMB internationalization model will gradually change from “current account” and “liability type” to “both current account and capital account” and “both liability and asset type”, so as to promote the development of RMB internationalization to a higher stage and promote the balance of RMB input and output.
Eighth, the construction of digital currency will contribute to the internationalization of RMB. At present, the transaction of mainstream digital currency is mainly for the purpose of speculation. Excessive currency fluctuation may also make it easier for criminals to launder money and evade taxes. The biggest advantage of issuing digital currency by the central bank lies in government endorsement. In July 2019, the State Council officially approved the research and development of digital currency of the people’s Bank of China. At present, the people’s Bank of China has applied for 74 patents for digital currency. The Central Bank of China may become the first institution to launch sovereign digital currency, which will help improve the clearing efficiency of RMB transactions and help the internationalization of RMB.
Responsible editor: CT