RMB Internationalization: Routes and Roles
SINCE the outbreak of the global financial crisis, the lack of confidence in the international monetary system and turmoil of the international financial environment have given rise to a resounding demand for reform and reconstruction of the international monetary system. Meanwhile, although China has made some progress in RMB regionalization, the use of its currency is still not in line with its economic status as the second largest economy with the world’s highest foreign exchange reserve. RMB internationalization is the only route for China to comprehensively integrate into economic globalization and adapt to the current world political and economic arena.
Road Map of RMB Internationalization
The lesson that the Chinese government learned from the 2008 financial crisis demonstrated that it would have to face economic risks and political dilemmas if it were to remain dependent on the U.S. dollar in its foreign economic activities. From that point the government officially initiated RMB internationalization, which has the following features: a three-step approach from peripheralization to regionalization and then to internationalization; an implementation process that is compatible with the openness of the capital account and flexible exchange rate; and promotion of the RMB to a global currency of settlement, a global investment currency, and a global reserve currency. In the process of RMB internationalization, China has proceeded at a measured pace, thus lowering the costs of changing its former system.
China has made much headway in RMB internationalization in the following spheres: RMB settlement in cross-border trade; currency swap agreements with central banks of other countries and regions; reforms to the RMB exchange rate formation mechanism; development of the offshore RMB market in Hong Kong; promotion of RMB settlement in overseas markets; and promotion of the cross-border RMB settlement of foreign direct investment. The progress that has been made in the latter under current accounts, direct investment accounts, and capital and financial accounts enhances the RMB’s function of medium of exchange as a global currency. On top of the development of RMB cross-border settlement, offshore RMB centers have been gradually established; a three-level network in which the RMB is used in global trade has been formed, the three levels referring to the onshore RMB market in Shanghai, the RMB offshore center in Hong Kong, and other offshore RMB centers in other regions. Currently the RMB circulates in some of China’s neighboring economies and has become one of the currencies used in payment and settlement in Vietnam, Thailand, and Pakistan. Generally speaking, the RMB has fulfilled three functions, namely as a medium of exchange, a unit of account, and a store of value in China’s economic activities with or in its neighboring economies. According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), by the second quarter of 2015, the RMB had maintained its status as the world’s second most used trade-finance currency, the fifth biggest payment currency, the sixth largest foreign exchange currency, and the sixth largest currency used in interbank loans. In the first half of 2015, the shares of RMB in global trade-finance, payment, foreign exchange, and interbank loans were 7.9 percent, 2 percent, 2.8 percent, and 2.7 percent respectively. Its share in interbank loans has already surpassed that of the Japanese yen. However, China should be aware that RMB internationalization is still in an early stage of regionalization.
Facilitate Stability of the International Monetary System and Prosperity of the Global Economy
RMB internationalization has not only dug China out of an embarrassing situation of being a large trading country with a weak currency and helped China avoid risks in international trade, but also promoted the development of international trade and the world economy, and enhanced advancement of economic globalization and improvement of the international monetary system.
The global financial crisis in 2008 caused a series of problems, such as the global economic recession and economic imbalance, the asset price bubbles, and financial fluctuations, exposing the shortcomings of the current international monetary system. It is an important choice to promote the international monetary system’s multi-polarization process and reduce dependence on the U.S. dollar through international currency competition so that global economic and financial stability can be maintained and transaction costs can be lowered. The key to realizing multi-polarization is to increase the variety of reserve currencies.
Judging by its economic power and scale, China’s RMB is basically qualified to become a global reserve currency. It is conducive to alleviating global economic imbalances from a systematic level and promoting the development of the world economy if the RMB is allowed to become one of the major global currencies and, together with the euro, compete with the U.S. dollar. RMB internationalization is beneficial for achieving international currency multi-polarization, making up for the defects of the current international monetary system and realizing inclusive development of the world economy. In a word, to promote the progress of RMB internationalization brings advantages to China’s economic development and to the stability of the global monetary system and prosperity of the world economy.
Stable Development
There are still some problems with the process of RMB internationalization. First, there are internal questions: how to build an open financial market with effective supervision and control; how to improve management of Chinese enterprises and especially financial institutions to sharpen their competitive edge in the world; how to enhance independence and professional ability of monetary policy-making institutions; how to adjust the financial policy system to achieve internal and external balance; and how to make China’s foreign policy better serve its economic opening-up. Hard work and patience are required to achieve a systematic reform. From the perspective of external factors, the reactions of key countries in the current international monetary system, such as the U.S. and Japan, will exert great impact on the process of RMB internationalization.
Second, the process of a currency’s internationalization is mainly driven by the market. In terms of market demand, China has basically met the conditions to internationalize its currency; however, in terms of market supply, China still has much to do because the RMB is not yet fully convertible and the development and openness of China’s financial market still needs to be improved.
Third, although China’s economic scale is big enough to support the RMB to become a global currency, China is not yet a strong economic and financial power and still has a long way to go to adjust its economic structure and transform its development model, and raise its global influence in cultural, political and military spheres. Meanwhile, the inertia exhibited by the international monetary structure usually makes internationalizing a currency a long process impossible to achieve in just one step. The process of other currencies’ internationalization also implies that RMB internationalization will be a long process.
Therefore, against the background of a changing global economic pattern and an unstable international monetary and financial environment, RMB internationalization adopts a gradual strategy of creating demand prudently in the first stage and releasing supply proactively in the later stage. A more practical move now is to build the RMB as a credible currency that can be conveniently used in valuation and settlement among international trade participants. China plans to further improve and optimize the policy to facilitate the use of the RMB in international trade.
Looking to the future, the international environment is generally fertile for RMB internationalization. The implementation of national strategies such as “the Belt and Road Initiative” will stimulate more market demand, thus creating investment and financing opportunities, and market conditions for RMB internationalization. Financial institutions such as the BRICS Development Bank, the Asian Infrastructure Investment Bank, and the Silk Road Fund, which were established under China’s efforts, also play a proactive role in RMB internationalization. The China (Shanghai) Pilot Free Trade Zone where various financial reforms have been carried out served as a test ground. It is foreseeable that RMB internationalization will embrace stable development in both scale and scope.
