Internationalization of renminbi is an irreversible trend

The suggestions released after the conclusion of the Fifth Plenary Session of 19th Communist Party of China Central Committee last week said China will prudently and cautiously promote the internationalization of the renminbi. China has been making efforts to internationalize the renminbi for the past more than one decade.

The renminbi’s importance in the International Monetary Fund’s system has been growing. According to the 2020 RMB Internationalization Report of the People’s Bank of China, the share of China’s trade settled in renminbi increased from less than 1 percent in 2009 to more than 20 percent in 2019. And the size of renminbi reserves was the fifthhighest in the IMF’s Currency Composition of the Official Foreign Exchange Reserves, with a market share of 1.95 percent, 0.88 percent higher than that in 2016 when the renminbi was included in the IMF’s Special Drawing Rights currency basket.

Also, the renminbi ranked fifth among the world’s currencies used for international payments, with a market share of 1.76 percent, while its share in foreign exchange trading was 4.3 percent (again ranked fifth). Given the complicated and volatile global situation, such progress is impressive.

China has a series of reforms lined up to further promote the renminbi’s internationalization. Starting from pilot programs to simplify crossborder payments, China has almost fully liberalized its current account in renminbi. Now, banks in China’s 18 free trade zones, including those in Shanghai, Guangdong and Tianjin, can directly settle crossborder payments in renminbi for trade in goods and services, and handle the payment and use of renminbidenominated income funds for highquality enterprises’ capital projects based on receipt/payment instructions.

China has also been opening up its economy through such arrangements as Renminbi Qualified Foreign Institutional Investors, ShanghaiHong Kong Stock Connect, China Interbank Bond Market, ShenzhenHong Kong Stock Connect, Bond Link and ShanghaiLondon Connect. In 2019, crossborder capital account renminbi settlements reached 13.62 trillion yuan ($2.01 trillion). And the fact that direct investments, securities investments and crossborder funding accounted for 20 percent, 70 percent and 7 percent of the total settlement respectively reflects the growing global demand for renminbidenominated assets.

Apart from establishing a marketoriented renminbi exchange rate regime with macroprudential management, the PBOC has also signed bilateral currency swap agreements with 39 central banks or monetary authorities, covering the world’s major developed and emerging economies, and established major offshore renminbi centers with total deposits of more than 3.7 trillion yuan.

By the end of last year, renminbi clearing arrangements had covered 25 countries and regions. And up to May 15 this year, foreign traders’ inward remittance was equivalent to 3.71 billion yuan and outward remittance equivalent to 3.80 billion yuan, accounting for 70.87 percent and 82.59 percent of the total.

Yet the renminbi is still an international currency in the making. Compared with the market share of the US dollar (44 percent) and the euro (31 percent), the renminbi (1.8 percent) lags far behind when it comes to global payments.

Besides, the growth of the renminbi as a trade settlement tool is concentrated largely in the AsiaPacific region, especially in the transactions between China and its neighbors. For example, 10 percent of SinoIndonesian trade is settled in renminbi, especially because China has become Indonesia’s largest trading partner with their bilateral trade volume being twice as much as that between the United States and Indonesia.

But when it comes to the use of the renminbi in the European Union and the United Kingdom, as Barry Eichengreen, professor of economics at the University of California, Berkeley, said, the dollar still enjoys “exorbitant privilege” as the only true global currency. Even when Europeans need renminbi, they normally use euros to buy dollars, and then exchange those dollars for renminbi to reduce transaction costs. As such, the dollar would remain dominant in the international monetary system despite the transformation of the global economy.

However, it has never been China’s ambition to replace the dollar with the renminbi as the dominant global currency. Back in 2009, China began seeking reform in the IMF to help build a more balanced global financial architecture and reduce its financial vulnerability, and also started taking measures to internationalize the renminbi.

That many other emerging market economies still feel vulnerable in the existing international monetary system despite having large foreign exchange reserves and improving their financial supervision and regulations reflects the collective failure to reform the IMF. In this regard, the renminbi’s gradual internationalization will help build a global monetary system with multiple international currencies, instead of just one.

The renminbi’s growing importance in the international monetary system is an irreversible trend, due largely to China’s determination to further open up its financial markets. With time, a more diversified international monetary system in which the renminbi plays its due role alongside other major currencies will emerge.