THINK TANKSep 21, 2017

Andrew D. X. Tang: Ideas on the Internationalisation of the RMB

To make great financial achievements in the whole world, RMB internationalisation is inevitable.

Following 30 years of development, China has come to the centre stage of global economy, no longer as an outsider but an active player. Looking towards the next decade, financial industry seems to be the most important sector contributing to the future growth of Chinese economy. To make great financial achievements in the whole world, RMB internationalisation is inevitable.

This is indeed an endless topic which is by no means a light one. From the perspective of global index, Dollar and Euro are 53.2 and 23.6 while RMB is only 0.87. On the realistic level, RMB is far behind the other two currencies. Siwei Cheng, a well-known economist, pointed out that RMB internationalisation was mainly realized by taking five steps: it should firstly be able to circulate abroad, and then be used in sequence for the purpose of trade quoting, trade settlement along with investment and financing. Only by following these steps can RMB eventually come to the last stage— becoming the international reserve currency. It is thus clear that RMB internationalisation is meant to deal with three problems: international payment, settlement and reserve. Moreover, this issue is in favour of outward-oriented development strategy of Chinese financial market and can ease up domestic inflation. Furthermore, it would benefit Chinese citizens conducting multinational trade activities.

Based on the rapid growth of Chinese economy, RMB became the third most-used currency in international payment. According to data published by SWIFT (Society for Worldwide Interbank Financial Telecommunications) in December 2014, the international monetary system has been dominated by two currencies: the USD and the Euro. The USD made 44 percent of international transactions while the EUR made 28 percent. 2.2 percent of all such payments were denominated in RMB. The fourth and the fifth most-used currencies for international payments are the Canadian dollar (1.9) and the Australian dollar (1.7). Good news is that RMB has already become the fifth global payment currency, just behind USD, Euro, Sterling and Japanese Yen. We’re fully convinced that the next decade will witness a brighter future based on the fact that RMB has already been accepted by global market before it being fully freely in the process of its internationalization.

In order to be able to use for international transactions and be widely admitted by other countries, one currency has to be equipped with such factors: a complete financial system, a stable political situation, a strong economic growth and an open economic and financial market. At this stage of Chinese financial market, it is still not ready to withstand the shock coming from global financial market. Therefore, promoting free convertibility of RMB during its internationalisation is against the development of Chinese financial market at present and even worse for stable growth of Chinese economy. On the contrary, promoting free convertibility of RMB will invoke massive foreign capital inflow, which results in economic recession. During RMB internationalisation, continuing a slow progress and meanwhile carrying out the RMB macro-control policy with the slogan of “never loosen, never tighten” has practical significance.

Global payment occurs mainly in global trading activities. Regardless of being unilateral, bilateral or even multilateral trade, the most effective solution to RMB Internationalisation is using RMB as payment currency to the greatest extent. On April 7th 2009, the State Council executive meeting decided to promote pilot projects in Shanghai, Guangzhou, Shenzhen, Zhuhai, Dongguan for the use of the RMB in cross-border trade, being a milestone event of RMB globalisation. According to statistics published by RCPMIS (RMB Cross-border Payment & Receipt Management Information System), until the end of 2009, the cumulative number of banks handling cross-border trade settlement deals using RMB was 409, amounting to 3.58 billion yuan. In 2010 global cross-border trade settlement deals had a value of total 506 billion yuan. In 2011 this number was 2080 billion yuan, 3.1 times more than that of 2010. In 2012 it grew to 2940 billion yuan, 41.3% higher than the number in last year. In 2013, the number was 4630 billion yuan, even 57.48% higher than that of 2012. In 2014, the total value of RMB cross-border trade settlement deals amounted to 6550 billion yuan, 41.4 higher than that of last year. From the figures, one could see, from 2009 to the end of 2014, RMB cross-border trade settlement business has slowed a bit, but had reached remarkable achievements.

Using RMB as international settlement currency is beneficial for its rate-forming mechanism, enhancing its status and impact in the global currency system. Moreover, Chinese economic, trading and investment activities abroad would be strengthened. Furthermore, it would also raise the impact of Chinese currency policy on Global economy.

Besides, international reserve also plays a vital role in the process of RMB internationalisation. As time goes on, RMB has already been admitted as reserve currency by central banks of over 40 countries. In traditional economic theories, the prerequisite of being reserve currency is to be fully free convertible. However, RMB has realized this before satisfying the prerequisite, which is a further support for full convertibility and ability to resist the risks brought by global financial market.

According to latest statistics published by SWIFT (Society for Worldwide Interbank Financial Telecommunications) in November 2014, RMB has replaced Canadian Dollar to be the fifth most frequently used payment currency. Hopefully, this will contribute to RMB being included by IMF into SDR (Special Drawing Right), which is a global reserve currency. With the lift of the international status of RMB, it has an even greater potential to replace Japanese Yen in SDR, which currently contains USD, Euro, Sterling and Japanese Yen.

In conclusion, the fundamental question is to realize RMB internationalisation is to solve its global payment, settlement and reserve. Along with the process, full convertibility cannot be immediately completed. Before the maturity of Chinese financial market, gradually carrying forward RMB internationalisation will benefit a long-term development of Chinese financial market. Although the last five years has witnessed remarkable achievement in terms of RMB internationalisation, it still has a long way to go to keep up a pace with currencies such as USD or Euro. Only by considering the practical situation can RMB internationalisation play a significant role in the future development of Chinese financial market in the global economy.

Chief Executive Officer
Andrew D. Xiwen Tang

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