China Tries RMB Regionalization Measure

By intern reporter GU XIN

    ON March 23, 2009, Zhou Xiaochuan, governor of the People's Bank of China, published his article, "Thoughts on the Reform of the International Monetary System," which has attracted considerable public interest. What is the future of the RMB in the current gloomy global economic environment? Xia Bin, president of the Financial Research Institute of the Development Research Center of the State Council, hit the mark with the comment, "China is not pursuing the optimum target of complete internationalization of the RMB, but a suboptimal one: gradual regionalization of the currency."

    Regionalization means circulation and convertibility of a particular currency across borders, allowing it to be used as a reserve and settlement currency. A State Council executive meeting on April 8 announced that Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan would become pilot cities for trans-border trade payment settlements using RMB, the first experimental steps in regionalization of China's currency.

The introduction of a regional RMB settlement scheme will promote the currency's position in the international monetary system.

Regionalization Startup

    "A favorable balance of trade with China is a prerequisite for surrounding nations to use the RMB as a reserve currency," explains Zhang Yuyan, head of the Institute of Asia-Pacific Studies, Chinese Academy of Social Sciences. Only with a trade deficit can a country export its currency for circulation in other countries. Overall, China is not in this position, since it posted a foreign trade surplus of US $191.7 billion in 2008, despite a steep slide in the global economy late in the year.

    However, China has gradually replaced the U.S. as the main export market for Southeast Asian countries, meaning China now has trade deficits of tens of billions of US dollars with neighboring nations and regions. It is for this reason that the process of RMB regionalization has started with the ASEAN members adjoining the PRC.

    According to Tang Shuangning, board chairman of China Everbright Bank, the regionalization of the RMB requires several steps. The first is implementing RMB settlements within surrounding countries, then a gradual move to broader regionalization.

    At the end of 2008, the Chinese government declared that Guangdong, the Yangtze River Delta Area, Hong Kong, Macao, Guangxi Zhuang Autonomous Region and Yunnan Province would begin quoting prices and settling accounts in RMB in trade with ASEAN. Moreover, the People's Bank of China has signed a currency swap agreement valued at RMB 650 billion with monetary authorities in Hong Kong, the ROK, Malaysia, Indonesia, Belarus and Argentina.

    Of these currency swap economies, the ROK is China's fourth largest source of imports, and its sixth largest export market and trading partner. Hong Kong is the Chinese mainland's third largest export market and fifth largest trading partner. Malaysia is China's largest ASEAN trade partner, and ASEAN is China's third largest source of imports, and fourth largest export market and trading partner.

    Yi Xianrong, a research fellow of the Institute of Finance and Banking, Chinese Academy of Social Sciences, says that the currency swap agreements mean surrounding countries will more frequently use the RMB for settlements, enhancing international usage and coverage of the currency, as well as its general level of acceptance in Asia.