By Yi Xianrong, researcher with the Institute of Financial Research at the Chinese Academy of Social Sciences(CASS)
RMB internationalization has accelerated recently. Last week, the central banks of China, Qatar, Canada and Malaysia signed memorandums of cooperation on RMB clearance arrangement and currency swap deals. They also decided to set up RMB clearance banks in Doha and Toronto. This week, China’s central bank reached agreements with Australia and Germany about arrangements for setting up RMB clearance in the two countries. These deals show that the RMB internationalization has entered major countries worldwide.
Currency internationalization refers to the use of a certain currency beyond the jurisdiction of the issuing authorities, and being accepted by markets in other countries or regions as the charge unit, medium of exchange and for storage, and so on. RMB internationalization means that the renminbi goes beyond the jurisdiction of the People's Bank of China (PBC), and is accepted as the money of account, investment currency, and reserve currency in the markets of other countries and regions.
Since reform and opening-up in 1978, trade between China and other territories has greatly increased. At that time, it was impossible to use and exchange the renminbi beyond the Chinese borders, and the renminbi was only accepted and owned by a small minority foreign businessmen who used it in trade with China. The renminbi was still far away from internationalization because of its limited use in scope and quantity overseas.
In 2004, China allowed individuals to open RMB bank accounts in Hong Kong. China's Ministry of Finance and financial institutions issued two-to-three-year-long RMB bonds in Hong Kong, which became the first offshore investment products of the renminbi. In 2009, the pilot RMB settlement of cross-border trade was launched in five mainland cities in China. But enterprises were not enthusiastic about it because of the expectations of the RMB appreciation, the high cost of financing, and the lack of financial means to offset risks.
Since 2010, Hong Kong has seen the free flow of capitals in the form of the renminbi among its banks and rapid development of the renminbi offshore business. In 2011, Hong Kong and the mainland launched the pilot system of RMB Qualified Foreign Institutional Investors (RQFII), which successfully connected the renminbi offshore market with the onshore securities market and contributed to the rise of renminbi investment products in Hong Kong.
At the same time, the Chinese government gave permission to foreign direct investment in China and overseas direct investment in the form of the renminbi, further releasing restrictions on the cross-border capital flows and enhancing the investment role of the renminbi.
And since 2009, the People's Bank of China has signed bilateral currency swap agreements worth a combined total of 3 trillion yuan with 29 monetary authorities overseas. Since 2013, China has expanded the RMB clearance and RQFII services to the UK, Singapore, South Korea, France, Germany, Qatar, Canada and Australia.
The renminbi’s internationalization is mainly manifested in its role as a settlement currency. In 2009, the cross-border RMB trade settlement only hit 3.58 billion yuan, but grew to 506.1 billion, 2.09 trillion, 2.94 trillion and 4.63 trillion respectively in the next four years.
In the first three quarters of 2014, the amount of RMB trade settlement reached 4.8 trillion yuan, surpassing the total amount for the whole of 2013. And the RMB business services covered nearly 200 countries and regions. In the rankings of world settlement currencies, the renminbi has been in the top 10 for 10 consecutive months, from the end of 2013. And as of September this year, it had been in seventh place for seven consecutive months.
But the renminbi, as the investment and reserve currency, is still undergoing a slow internationalization process. So the Chinese government has recently announced that it will accelerate the process of the renminbi’s internationalization and make the renminbi a major investment and reserve currency in the international monetary system, so as to realize the long-term goal of RMB exchange rate reform in China. This mission is acknowledged nationwide. The Hong Kong-Shanghai Stock Connect, which was launched several days ago, is designed to be an important means to help the renminbi become a major investment currency.
In addition, China is striving to make the renminbi a reserve currency because if the renminbi cannot become a reserve currency, China would not hold the basic status in the new international monetary system, regardless of the strength of its real economy.
Recently, there have been predictions at home and abroad that by 2030, the renminbi will probably parallel with the U.S. Dollar to become one of the dominant currencies of the international market. To achieve this goal, China has to achieve a complete internationalization of the renminbi, in other words, make it the currency of settlement, investment and reserve in the global market.
Although the renminbi is increasingly used overseas as a settlement currency, it still has a long way to to go to catch up with other major international currencies because the renminbi capital accounts are not fully open and the renminbi is not freely convertible.
More importantly, the tendency of developed economies changing global governance is unfolding. The developed economies as a whole, not satisfied with the current global governance and the rules of market, are seeking to form a new 'holy alliance' and establish new rules of the international markets by sealing new trade and investment deals and setting up a long-term and stable network for currency swap.
So China urgently needs to speed up the process of RMB internationalization, and strengthen the multi-level use of the renminbi worldwide in terms of global reserves, cross-border trade, foreign investment, so as to highlight "China power" in promoting the reform of the international monetary system.
China and several major economies have recently signed currency swap agreements and agreed to set up the renminbi clearance banks with the aim of breaking the vested interests of the holy alliance and accelerating the process of RMB internationalization.
RMB internalization is likely to achieve substantive progress and share equal status with the U.S. dollar, the euro, the pound, and the yen in the next five to ten years. The Chinese government should further accelerate the market-oriented reforms of the RMB exchange rate formation mechanism and the interests rate in the financial market. These reforms are the foundation of sustained and stable economic growth, high economic efficiency, and improvement of state credit. So the most important thing about the RMB internationalization is to handle Chinese domestic affairs well. Only in this way can China enhance its economic strength and achieve successful RMB internationalization.