Since 2009, following the global financial crisis, China embarked on an assertive path to renminbi internationalization. Frustrated by U.S. dollar hegemony, China sought to mitigate vulnerabilities exposed during the crisis. The dollar’s dominance allowed the United States to shield itself more effectively through monetary policy, leaving nations like China more exposed to economic repercussions. The RMB internationalization became a strategic move to reduce dependence on the dollar, enhance China’s economic resilience, and assert its influence in the global financial landscape.
Table of Contents
Steps Taken to Internationalize the Renminbi: A Strategic Evolution
Offshore RMB Bond Markets: Paving the Way (2007)
- Introduction of Dim Sum Bonds: China initiated the internationalization of the Renminbi (RMB) by creating offshore RMB bond markets. Dim Sum bonds, launched in Hong Kong in 2007, marked the beginning of RMB-denominated bond issuance beyond China’s borders. This move allowed the purchase of RMB-denominated bonds outside China, subject to fewer restrictions.
Offshore RMB: CNH vs. CNY (2007)
- Launch of Offshore Renminbi (CNH): In tandem with dim sum bonds, China introduced the offshore Renminbi (CNH) alongside its onshore counterpart (CNY). This dual-currency system facilitated offshore transactions in Renminbi and contributed to the currency’s global reach.
Bilateral Currency Swap Arrangements: Expanding Cross-Border Liquidity (Post-2007)
- Numerous Bilateral Swap Arrangements: China concluded a multitude of bilateral currency swap agreements with other countries, exceeding 30 swap lines by 2020. This strategic move significantly surpassed other nations, enhancing cross-border liquidity and reinforcing RMB’s global presence.
Promotion of International Trade Settlement (Early to Mid-2010s)
- Establishment of Offshore RMB Clearing Hubs: China focused on promoting international trade settlement by establishing a network of offshore RMB clearing hubs worldwide. Each hub designated a state-owned commercial bank as the clearing bank. This expansion facilitated cross-border trade settlement in RMB, though Hong Kong remained a focal point.
Cross-border Interbank Payments System (CIPS) Launch (2015)
- Introduction of CIPS: China launched the Cross-border Interbank Payments System (CIPS) in 2015, aiming to enhance international clearing and settlement in RMB. Operating parallel to the SWIFT global standard, CIPS provided an alternative avenue for global financial transactions.
Financial Market Reforms and Initiatives
- Foreign Institutional Investor Participation: Efforts to internationalize the RMB included expanding participation by foreign institutional investors in China’s bond and stock markets. Stock-connect programs with Hong Kong and London, alongside a bond-connect program with Hong Kong in 2017, facilitated international investment.
- Market-Determined Interest Rates: Domestic interest rates in China became more market-determined, signaling a shift towards financial market liberalization. The managed float regime of the RMB was reset in 2015 to follow a basket of currencies, moving away from a sole dependence on the US dollar.
Belt and Road Initiative (BRI): Leveraging Development Banks (Post-2013)
- BRI as a Vehicle for RMB Internationalization: China strategically utilized the Belt and Road Initiative (BRI), supported by international development banks like the Asian Infrastructure Investment Bank (AIIB), Silk Road Fund, and the New Development Bank, to promote RMB internationalization.
Inclusion in Special Drawing Rights (SDR) Basket (2016)
- Symbolic Inclusion in SDR Basket: The international recognition of the RMB’s growing role culminated in its inclusion in the Special Drawing Rights (SDR) basket by the International Monetary Fund (IMF) in 2016. While symbolically significant, this inclusion elevated the RMB alongside major global currencies, acknowledging its evolving status as an international investment and reserve currency.
China’s strategic steps to internationalize the Renminbi reflect a nuanced and evolving approach, encompassing financial market reforms, bilateral agreements, and leveraging global initiatives like the Belt and Road Initiative. These efforts underscore China’s commitment to shaping the international monetary landscape and elevating the global status of its currency.
Limitations of Renminbi Internationalization
China’s ambitious initiatives to globalize the Renminbi (RMB) have encountered challenges and limitations, revealing the complexities of achieving true internationalization.
1. Global Utilization Figures: Underwhelming Progress
Despite being the world’s second-largest economy and leading trading nation, the RMB’s share in global payments, foreign exchange market activity, and foreign exchange reserves remains below 5%. The figures, outlined in Table 1, depict modest progress in RMB internationalization compared to dominant currencies like the USD and Euro.
2. Post-Stock Market Crisis Impact
The 2015 crash on China’s stock markets forced the government to devalue the RMB, leading to tightened capital controls to curb depreciation and prevent capital flight. This move diminished international confidence in the RMB, slowing its internationalization and, in some areas, reversing previous progress.
3. Capital Account Restrictions: Self-Imposed Limitations
China’s self-imposed limitations on its capital account, among the least open globally, and restricted financial markets for foreign participants impede the RMB’s true potential. Initiatives favoring control and potential reversibility limit the currency’s broader international adoption.
4. Currency Circulation Challenges: Persistent Current Account Surplus
The RMB’s global circulation faces hurdles due to China’s persistent current account surplus. Efforts to increase global circulation require trade-offs, such as expanding capital outflows. However, achieving this necessitates greater convertibility on the capital account, a move China has been hesitant to make.
5. Financial System Weakness: Impediment to Internationalization
China’s financial system, plagued by issues like lack of regulation, inefficient credit allocation, speculation, corruption, and non-performing loans, poses a significant hurdle to RMB internationalization. High levels of debt, especially held by state-owned entities, remain a major concern.
class=”wp-block-heading”>6. Shadow-Banking Risks: Opaque Financial Practices
The shadow-banking sector in China, characterized by opaque practices like off-balance sheet loans and high-risk wealth management products, contributes to financial leverage. While the government has taken steps to address these issues, uncertainties remain about the sector’s stability.
7. Financial Market Opening: Cautious Approach
China’s cautious approach to opening its financial markets reflects concerns about major capital flight and financial instability. Despite efforts to address financial sector problems, more reforms are required for confident international adoption of the RMB.
8. Confidence Building Measures: Regulatory and Institutional Enhancements
To foster international confidence, Beijing must strengthen regulatory, governance, and institutional structures supporting the RMB. This involves reducing government intervention, relying more on market mechanisms, and ensuring continuous de-politicization of financial matters.
9. Pandemic Impact on Financial Reforms: Uncertain Future
The ongoing coronavirus pandemic might impact Beijing’s appetite for financial reforms, potentially leading to further accumulation of debt to offset economic challenges. Balancing economic stability with financial reforms becomes crucial in the post-pandemic landscape.
10. Geopolitical Considerations: Navigating a Tense Environment
Amid geopolitical tensions and political instability in regions like Hong Kong, sustaining efforts toward RMB internationalization requires careful navigation of the geopolitical environment. Continuous de-politicization of financial matters remains vital for long-term success.
The Global Impact of China’s Digital Currency: Unleashing the Potential
China’s Digital Currency Electronic Payment (DCEP) arrives on the global stage at a crucial juncture, where strides have been made in internationalizing the Renminbi (RMB), but challenges persist. The question looms: will DCEP confine itself to China, or is it poised to transcend borders, potentially reshaping the global financial landscape?
Impact on Renminbi Internationalization:
Facilitating International Payments: Positioned primarily as a payments system, DCEP is poised to facilitate international payments in RMB. Streamlining cross-border RMB-denominated settlements, it offers a simplified method for companies engaged in trade with China. By eliminating the need for the US dollar as an intermediary currency, DCEP aims to reduce currency exchange costs and risks.
Breaking Global Currency Network Characteristics: DCEP’s cost-effective nature challenges the entrenched network characteristics of the global currency system. It presents a viable alternative, making direct exchanges into RMB more convenient than relying on the US dollar as an intermediary.
Digitization of Trade: DCEP’s appeal extends to potential incorporation into broader trade digitization programs. In synergy with these initiatives, DCEP could significantly contribute to China’s strategy of intensifying global demand for its currency.
Global Adoption in Developing Countries: Beyond trade, DCEP holds potential for common payments and transactions in developing countries with underdeveloped financial infrastructures. Its accessibility and NFC functionality make it an attractive alternative to local currencies, addressing the needs of unbanked populations.
SWIFT Alternative: DCEP’s role could extend to circumventing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system for international transactions. With faster transaction times and cost-effectiveness, DCEP emerges as a competitive alternative to the conventional SWIFT system.
Implications for Global Dominance of the US Dollar:
DCEP as a Catalyst: DCEP’s most promising strength lies in its potential to shift the world payments system in favor of the RMB. As a readily available alternative for payment transactions, it could become an attractive option for businesses engaged in international trade with China.
Potential Economic Decoupling: Economic decoupling between the US and China may create space for DCEP to flourish, especially in regions where China holds significant influence. Proactive encouragement from Beijing to international partners could further boost DCEP’s acceptance.
Challenging Established Systems: DCEP provides China with an opportunity to establish a comprehensive alternative to existing global payments systems, such as SWIFT and CHIPS. By offering an entirely new mechanism, China aims to reduce dependence on Western-centric systems.
Limited Impact on Investment Decisions: While DCEP may influence cross-border payments, its impact on investment and reserve currency decisions is limited. Fundamental considerations of China’s financial system remain pivotal for investment choices.
Gradual Erosion of US Dollar Hegemony: DCEP’s global rollout offers China a significant opportunity to chip away at US dollar hegemony. By expanding the space for the RMB and providing a viable alternative, DCEP lays the groundwork for a gradual erosion of the US dollar’s dominance.
Future Outlook: Navigating Challenges and Shaping Global Finance
As China takes the lead in rolling out its Digital Currency Electronic Payment (DCEP), the future unfolds with a mix of opportunities, challenges, and the potential transformation of global financial dynamics.
First-Mover Advantage and Global Influence: China’s first-mover advantage is undeniable. With a population deeply familiar with digital payments and the widespread use of platforms like Alipay and WeChat Pay, China provides an ideal testing ground for DCEP. The practical testing of ‘controllable anonymity’ in a country with fewer privacy concerns positions China uniquely. This advantage extends beyond the domestic landscape, offering China an opportunity to set technological standards and influence the trajectory of digital currency technology globally.
Internationalizing DCEP: The prospect of internationalizing DCEP hinges on resolving key contradictions. Despite China’s current account surplus, achieving rapid international circulation of the RMB poses challenges. Building confidence among overseas users becomes paramount. Ensuring faith in the Chinese economy, its institutions, policies, financial system, and the specific functionalities and security of DCEP is crucial. The notion of ‘controllable anonymity’ will need careful explanation to assuage concerns, particularly regarding privacy and potential surveillance.
Risks and Learning Opportunities: China’s early adoption of DCEP also implies assuming inherent risks. Any missteps or challenges in this sensitive area could be educational for other countries. As China navigates this uncharted territory, other nations can observe, learn, and adapt positives while avoiding potential pitfalls. The global community, spurred by China’s efforts, is already exploring its own Central Bank Digital Currencies (CBDCs), indicating a collective response to the evolving digital currency landscape.
Potential Multipolar Currency Landscape: While China’s scalability is a strength, other powerful players, notably the United States, are poised to follow suit in the digital currency era. The emergence of a multipolar system with several interconnected digital currencies seems likely. The U.S., with strong fintech capabilities, may reduce the extent to which China capitalizes on its first-mover advantage.
Long-Term Implications: In the long term, DCEP offers China a channel for RMB internationalization and a means to challenge the dominance of the U.S. dollar. Initially focusing on international payments, DCEP’s true impact may unfold in the medium to long term, advancing the RMB as an international investment and reserve currency. However, this depends on the evolution of China’s domestic financial system, international liquidity of the RMB, and the responses of other nations, particularly the United States.
In essence, the early launch of DCEP marks the beginning of transformative changes in the global financial architecture. China’s journey into the CBDC era will shape not only its own economic landscape but also influence the responses and strategies of other nations. The outcome is a dynamic interplay of global economic shifts, policy decisions, and technological advancements, with China at the forefront of this groundbreaking transformation.
China’s Digital Currency Electronic Payment (DCEP) places the nation at the forefront of the evolving digital currency era. With a first-mover advantage, China is set to reshape international payments, leveraging its vast population and tech-savvy society. DCEP’s focus on international payments is the initial step, but its potential extends to positioning the Renminbi as a global investment and reserve currency. However, challenges loom, from building confidence among overseas users to navigating international economic dynamics. The global financial landscape is on the brink of transformative changes, driven by China’s pioneering move into the CBDC era.