Zhao Xijun: Renminbi Internationalization Chinese Dream from Monetary Perspective

2015-04-09 IMI

Zhao Xijun: Associate Dean, School of Finance, Renmin University of China The year 2014 has been the “new normal” for Chinese economy. Facing both the global circumstances which were complex and changeable, and the domestic reforms which were huge and tough, the economy has experienced a stable growth, while kept a positive momentum of structure optimization, quality advance and life improvement. The economy size has reached a new record high of 63.6463 trillions of Renminbi yuan in GDP term, a 7.4% increase with previous year at fixed price level. The trade volume has attained 26.4335 RMB yuan, 2.3% higher than previous year, gaining a surplus of 2.3489 RMB yuan. Renminbi internationalization has made appreciable progress during 2014. Firstly, the cross border Renminbi settlement and payment has experienced a fast growth. The Renminbi cross border settlement volume achieved 3.27 trillions in trade and 469.9 billions in FDI in the first half of 2014, among them, the Renminbi settlement used in cross border commodity trade, service trade, ODI and FDI were 2.09 trillions, 1.18 trillions, 86.5 billions and 383.4 billions respectively. Secondly, the liberalization of capital account control has been advanced further. According to the statistics from the State Administration of Feign Exchange (SAFE), 252 Qualified Foreign Institutional Investors (QFII), 71 Renminbi Qualified Foreign Institutional Investors (RQFII) and 121 Qualified Domestic Institutional Investors (QDII) have had got their licenses, and the approved investable volume were 56.548 billions US dollar, 250.3 billions RMB yuan and 80.493 billions US dollar respectively by the middle of year 2014. Recently, Chinese government has had agreed to grant another 80 billions RMB Yuan of RQFII quota to South Korea and Germany respectively, adding another two more names on the RQFII list of Singapore, United Kingdom, France, Chinese Hongkong and Chinese Taiwan. The total RQFII investable volume is expected to reach 640 bilions RMB yuan. Thirdly, various of currency swaps, payment and settlement mechanisms have been setup for Renminbi transactions. By the end of 2012, People’s Bank of China had signed currency swap agreements with 18 counterparts including South Korea, Malaysia, Chinese Hongkong, Belarus, and Argentina, a total swap volume of 1.67 trillions RMB yuan. Only in 2012, PBOC had signed 4 new currency swap agreements of 260 billions RMB yuan with central bank of The United Arab Emirates, central bank of Turkey, the Reserve Bank of Australia and the National Bank of Ukraine, renewed 2 currency swap agreements of 190 billions RMB yuan with central bank of Mongolia and the National Bank of Malaysia. In the year 2013, PBOC had again signed 5 new currency swap agreements of 752 billions RMB yuan with central bank of Brazil, Bank of England, central bank of Hungary, Bank of Albania and the European Central Bank, renewed 3 currency swap agreements of 403.5 billions RMB yuan with central bank of Iceland, the Monetary Authority of Singapore, and the Bank of Indonesia. A lot more cooperative mechanism for overseas use of Renminbi has been set up in 2014. Authorized by PBOC, China Foreign Exchange Trade Center declared the direct trade between Renminbi and New Zealand dollar rather than cross trade on 18th March 2014. PBOC had signed a cooperative MOU with Deutsche Bundesbank for the Renminbi settlement arrangement in Frankfurt on 28th march 2014, signed the same MOU with Bank of England, Bank of France, Central Bank of Luxemburg, and Bank of Korea on 31st March, 28th June, and 3rd July respectively. These settlement arrangements will help the Renminbi business in Frankfurt, London, Paris, Luxemburg and Seoul, will encourage Chinese firms, Chinese financial institutions and their counterparties to use more Renminbi in cross border trade, and will certainly promote further facilitation and liberalization in mutual trade and investment. Lastly, more and more research reports and analysis have demonstrated that Renminbi has become increasingly attractive in overseas. A survey released by SHBC on Renminbi business based on global enterprises showed that the firms from France, Germany and Chinese Taiwan were the most active in recent emerging off-shore Renminbi market. This conclution was drawn by HSBC based on its investigation on more than 1300 firms from 11 global markets. It showed that in European market 26% and 23% of French and German firms have used Renminbi in their business. Another report released by Deutshche Bank also showed that the demand for Renminbi in Europe will be doubled after the set up of Renminbi settlement arrangement in Frankfurt and London. And given that the huge trade volume between China and European Union, Europe will very likely be the second largest Renminbi off-shore market around the world, furthermore, Renminbi will be used more in sino-europe bilateral trade. Though there is still unbalance in Renminbi internationalization. Even the use of Renminbi in trade pricing, settlement and payment, in investment and financial transactions has been increased substantially (according to data from SWIFT, Renminbi was ranked no.7 as global trade pricing, settlement and payment currency, no.9 as investment and financial transaction currency ), the 2.2% percentage point in global currency transaction is still very tiny volume compared with 85% percentage point of US dollar. Not to mention the 4 trillions us dollar daily foreign exchange transactions, most of these transactions are in equities, bonds, various derivatives and other assets transactions, trade pricing, settlement and payment are only very few of them. Even in the trade settlement and payment, the use of Renminbi mainly happened between China and its neighbors, while us dollar was the most used currency for the trade settlement and payment between China and developed nations. For example, only 2% of trade settlement and payment used Renminbi while the total trade volume between China and European Union was 559.1 billions us dollar. How to push forward Renminbi internationalization process in a more balanced way then? We know that for Renminbi to be an international currency, the economic transaction activities, including trade activities and financial activities between economic entities, are fundamental. As an international currency, Renminbi must function firstly as a instrument in trade pricing, settlement and payment, then in investment and financial transactions, then in reserve currency. As an international currency, Renminbi must serve firstly to transactions between Chinese residents and foreign residents, then to transactions between foreign residents. The internationalization of Renminbi should be pushed by twin wings. The first wing should be the use in international trade settlement and payment, the second wing should be the use in international financial transaction. We have made substantial progress for the well functioning of the first wing, such as measures to encourage use of Renminbi in cross border trade settlement and payment, the set up of clearing banks in international financial centers and big business cities, and the construction of a global clearing system for Renminbi business, more clearing arrangement agreements and currency swap agreements with foreign central banks, and more Renminbi trade finance for trade partners. And the most important among all is the full convertibility of Renminbi under current account, which offers the key facility and help for the use of Renminbi under current account. Because of the continuing improvement of the infrastructure and the support of government policy, the use of Renminbi in cross border trade settlement has been increased quickly. Several works have been conducted for the building of the second wing, such as reforms and innovations including the trial of Renminbi settlement for FDI under capital and financial account, the direct foreign extention of Renminbi loans, the issuance of Renminbi denominated bonds in domestic market by foreign institutions, and the new items created for portfolio investment such as QDII, QFII and RQFII, but the development process is far behind the building of the first wing, even without any clear ideas, due the complexity of the process and the prudent considerations. But the first wing will not fly long if we don’t have a second wing or with a weak second wing, finally, the disruption of Renminbi internationalization process will be inevitable. The solution for the problem will be simple: we need to build the second wing after the first wing. That means we need to develop the use of Renminbi in international financial transactions at the same time when we develop its use in international trade settlement. Which requires us to make more progress both in the relaxation of capital account control and the opening of domestic capital market. For the first job, we will continue to increase the volume of QDII, QFII, RQFII, until the full liberalization of capital account. For the second job, we will combine the future development of capital market with Renminbi internationalization, capital market should not only serve to domestic customers, but to both domestic and foreign customers. That means that the capital market should have a diversified, full range, and cross border arrangement for different investors in terms of financing size, instruments, maturities, and risks. From the perspective of Renminbi internationalization, China’s capital market should play a decisive role at least in the allocation of Renminbi assets, and should become the global liquidity center, investment and financing center, pricing center, innovation center and risk management center for Renminbi. It will solve every problem in Renminbi asset allocation for investor. Perhaps as long as every investor may allocate freely Renminbi asset, could Renminbi be a real international currency. And the Chinese dream of Renminbi internationalization will completely be realized.

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Zhao Xijun: Renminbi Internationalization Chinese Dream from Monetary Perspective

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