What Does Internationalising Renminbi Means for China and ASEAN?

Over the past decades, China has made great efforts to promote the internationalisation of the renminbi (RMB). The internationalisation of the RMB is to increase the use of RMB internationally as a unit of account, medium of exchange, and store of value. With solid efforts, the role of RMB has been strengthened across the board, from international payment and settlement, investment and financing, and reserves to pricing.

According to data from The People’s Bank of China (PBOC), the country’s central bank, nearly half of all cross-border transactions are settled in the RMB currently. And China’s cross-border RMB receipts and payments in non-banking sectors have risen by 15.2 percent year on year from January to August 2022, reaching 27.8 trillion yuan (about US$3.91 trillion). Furthermore, the share of securities investment in cross-border RMB receipts and payments increased from about 30 percent in 2017 to around 60 percent in 2021.

In addition, RMB was added to the basket of currencies that make up the Special Drawing Rights (SDP) in 2016, reflecting the great progress of the internationalisation of RMB. The SDR is an international reserve asset created by the International Monetary Fund (IMF) in 1969 to supplement its member countries’ official reserves. The recent data showed that the share of RMB in the basket rose from 10.92 percent in 2016 to 12.28 percent in May 2022.

PBOC recently published an article, saying it will steadily advance the currency’s internationalisation by strengthening coordination between domestic and foreign currencies, facilitating market entities to use the RMB more and promoting innovation in RMB cross-border investment and financing. This gives rise to a question. Given the current complex international environment, what are the impacts of increasing the international use of RMB on China and the world?

The impact on China

Advancing RMB internationalisation is driven by both China’s rapid rise and today’s changing international environment.

China has emerged as an economic and financial powerhouse quicker than anticipated, becoming the second-largest economy in the world. But the internationalisation of the RMB is relatively slower than expected. The use of RMB among global payment currencies experienced a slight increase at the beginning of 2022, but remained at around 2 percent currently. It indicates huge room for China to promote the use of RMB internationally.

The benefits of internationalising the RMB are obvious. It not only decreases the exchange rate risks in cross-border trade, investment and financial transactions but also reduces the reliance on foreign currencies such as the US dollar. China’s international trading settlement will be less affected by the shortage of USD or any other currencies. It also reduces the risk of speculative attacks that may result in the bankruptcy of firms due to the sharp depreciation of the RMB.

The US dollar can be a weapon against any country in the world. The financial sanction by the US on Russia is a good example. In particular, the tension between China and the US has escalated over the past years. The likelihood of US imposing new financial sanctions on China is increasing.

The difficult situation faced by Russia has issued Beijing an alert that China would be in the face of similar sanctions in the future, urging Beijing to accelerate its de-dollarisation and the RMB internationalisation efforts to protect China from possible attacks in the future.

A good opportunity for China

Evidence has shown that the dollar’s dominant position may hurt many countries whose majority of international trade is invoiced in dollars. Especially in 2022, US inflation reached above 8 percent, which is far beyond the target 2 percent inflation. The Federal Reserve has to tighten its monetary policy to combat the inflation. The federal fund rate has been lifted from near zero at the beginning of 2022 to between 3.75 percent and 4 percent in November. The rising interest rate tends to make the dollar stronger as the higher yields attract capital from international investors seeking higher returns on financial assets.

The greenback has climbed dramatically in 2022. However, a strong dollar will get emerging economies into troubles, making the developing countries more difficult to pay USD-denominated debt. In addition, it pushes up the bills for other countries’ manufacturers and businesses that need imported goods, worsening these countries’ inflation problems and slowing down their economic recovery.

These countries will start to rethink their reliance on the dollar and seek an alternative international currency or international payment system to hedge the risk of the rising dollar. The situation indeed provides a good opportunity for China to advance the process of RMB internationalisation.

The impacts on ASEAN countries

Earlier in 2019, China published a five-year blueprint to enhance economic and financial integration between southern Guangxi province and Southeast Asia, aiming to promote the widespread use of the RMB in cross-border trade.

Further, the government greatly supports RMB-denominated lending to projects in the region, seeking to build offshore RMB markets and promoting financial investment, according to Reuters. It has shown Beijing’s determination to internationalise the RMB.

Given the significant trade ties between China and ASEAN countries, the cross-border usage of RMB continues to grow. The cross-border RMB settlement volume has surged nearly 20-fold in a decade, according to China Daily.

Furthermore, because of the Regional Comprehensive Economic Partnership (RCEP) agreement signed in 2020, we can anticipate that China and the neighbouring countries will have greater economic integration and the RMB will play a more important role in regional economic activities in the future.

Curbing dollar reliance is another reason for ASEAN countries to increasingly use the RMB in intra-regional trade payment. The Southeast Asian countries have tried to avoid using dollars as an intermediary in cross-border payments.

On the one hand, they are reluctant to be negatively affected by the US tightening of monetary policy. On the other hand, recent sanctions on Russia also raised their concern about the high usage of the US dollar. They are actively searching for alternative financial channels to circumvent the potential sanctions to transact with their trading partners. The fast-growing RMB Cross-Border Interbank Payment System (CIPS) could be one of the options.

China, however, still has a long road to go before successfully internationalising the RMB. To achieve the goal, the country will have to improve the liquidity of RMB-denominated assets and simplify the process for foreign investors to enter the Chinese market. It means China should further relax capital control, liberalise its financial market and establish more offshore RMB centres. In addition, building mature financial and legal systems are the pre-requisites to internationalising the RMB.

The article is an edited version of the first one published in ThinkChina.