The internationalization of the renminbi: China’s effort to promote the international use of its currency

On October 1st, 2016, the executive board of the International Monetary Fund (IMF), after completing its regular five-yearly review of the basket of currencies that make up the Special Drawing Rights (SDR), has decided to include the Chinese renminbi (RMB) in that elite tier of global currencies. This is just one of the event manifested how the status of renminbi has been promoted in the international use. On February 4, 2016, a report about China’s efforts to expand the international use of the renminbi was published by the Brookings Institution. According to the report, the Chinese government has taken steps to promote the international use of its currency, the renminbi; and these efforts has produced preliminary results in recent years.

THE-RMB-WILL-PLAY-AN-INCREASINGLY-IMPORTANT-ROLE-IN-GLOBAL-TRADE-AND-FINANCE”-SAYS-BROOKINGS-REPORT

 “THE RMB WILL PLAY AN INCREASINGLY IMPORTANT ROLE IN GLOBAL TRADE AND FINANCE,” SAYS BROOKINGS REPORT: But China’s underdeveloped financial markets represent a “major constraint on the RMB’s rising prominence in international finance.”

China’s economy is now the second largest in the world and a key driver of global growth. However, the renminbi’s role as a global payments payment-graphic
currency is not commensurate with the size of China’s economy. As the figure on the right shows, the renminbi accounts for less than 2% of international payment transactions which represents the fifth-most important payment currency in the world.

China is seeking to expand the international use of its currency by permitting the settlement of trade transactions with the RMB; allowing issuance of RMB-denominated bonds in Hong Kong; permitting some banks to offer offshore RMB accounts; setting up RMB clearing centers, including in Frankfurt, Paris, and London; and creating a payment system for easier settlement of cross-border RMB transactions. Given China’s rising shares of global GDP and trade, these steps are gaining traction and portend a rising role for the RMB in global trade and finance.

 

 

As a result of the efforts Chinese government has taken, the use of the renminbi as an international payments currency has continued to grow rapidly. In the first half of 2015, there were more than RMB 5.7 trillion (USD 866.7 billion) worth of payments made to and from China using the renminbi. Currently, around a third of payments between China and the Asia Pacific region are conducted using renminbi. These numbers are projected to increase substantially over the coming years due to the desirability for Chinese businesses to use their own currency for trade transactions. The increased use of the renminbi has led to around RMB1.5 trillion (USD 231 billion) in offshore renminbi deposits.

The report from the Brookings concludes that “China’s capital account is likely to become largely open within the next three to five years, with few restrictions on capital inflows and outflows.” As a result, “The RMB will play an increasingly important role in global trade and finance, with the currency being used more widely to denominate and settle cross-border transactions.”

Because of this rise, there is concern that the renminbi could displace the dollar as the world’s dominant currency. According to Brookings, as the renminbi becomes a prominent international currency, it will diminish the dollar’s role in international trade transactions.

“These developments, in tandem with measures taken by China to develop its own payment system, could diminish the primacy of U.S. financial institutions,” Brookings said. “This would affect the ability of the United States to continue wielding the financial clout that it currently has as a result of the dollar’s dominance in international finance.”

In 2015, trade settlement in renminbi totaled $1.7 trillion, about 25 percent of China’s annual trade. The Chinese government’s approach to policies that promote the RMB’s use as an international currency is closely linked to domestic macroeconomic objectives and financial market development. “So long as China continues to make progress on financial sector and other market-oriented reforms, it is likely that the renminbi will become an important reserve currency within the next decade, perhaps eroding but not displacing the dollar’s dominance,” states the report.

 

 

 

Reference:

Eswar Prasad, February 4, 2016. “CHINA’S EFFORTS TO EXPAND THE INTERNATIONAL USE OF THE RENMINBI” The Brookings Institution

http://freebeacon.com/issues/report-chinas-currency-will-diminish-dollars-role-in-international-trade/

http://www.brookings.edu/research/reports/2016/02/04-china-efforts-international-use-renminbi-prasad

China Promoting International Use of RMB

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