By Song Ke, Deputy Director of the International Monetary Institute of Renmin University of China
The internationalization index of the Chinese currency renminbi (RMB), or the yuan, hit a 5-1/2-year high, according to a recent Reuters report.
Citibank predicted that the RMB is likely to overtake the Japanese yen and British pound to become the third most-recognized global settlement currency by the year 2030.
In 2009, the People’s Bank of China (PBOC), China’s central bank, launched a pilot project to use the RMB in the settlement of cross-border trade, ushering in the internationalization of the currency.
Over more than a decade, the RMB has emerged as an important currency in cross-border trade, financial transactions, and official foreign exchange reserves, becoming increasingly market-oriented and internationally recognized. Meanwhile, the currency has also played a crucial role in facilitating trade and investment, promoting innovative development of the financial sector, as well as serving the real economy and other areas.
The RMB Internationalization Index (RII) had risen from 0.02 in the first quarter of 2010 to 5.02 in the fourth quarter of 2020, growing by more than 250 times in ten years, according to figures released by the International Monetary Institute (IMI) of Renmin University of China.
The RII, though still lower than the internationalization indexes of the U.S. dollar (51.27) and the euro (26.17), has surpassed those of the yen (4.91) and the pound (4.15) and ranked third among major currencies for three consecutive quarters.
It’s quite obvious that in recent years, although China’s capital account hasn’t been fully opened, the overall internationalization level of the RMB has been elevated constantly. The country has preliminarily blazed a path of currency internationalization with Chinese characteristics, which can be attributed to its achievements in the following aspects.
First, China has maintained the long-term “crisis-free growth” of its real economy, cornerstone of currency internationalization, providing a solid foundation for the internationalization of the RMB.
As the COVID-19 pandemic has plunged global economy into deep recession and made the external environment increasingly severe, China’s becoming the first country among the world’s major economies to realize positive economic growth has further increased global investors’ confidence in the RMB and RMB financial assets.
Second, China has always adhered to high-level opening-up, enabling the RMB to gradually perform more functions around the globe.
The size and share of the RMB in cross-border trade settlement have seen growth while maintaining stability. As to the use of the RMB in financial transactions, outbound direct investment (ODI) and foreign direct investment (FDI) using the RMB have grown steadily; the construction of the offshore RMB bond market has been advanced; the capital market has been opened up at a faster pace; the financial derivative market has made breakthroughs; and RMB financial assets have won favor with global investors.
With the entry of the RMB into the IMF’s Special Drawing Rights (SDR) basket, the amount of the RMB in global foreign exchange reserves increased from $90.78 billion in 2016 to $269.49 billion in 2020, recording growth in ten straight quarters. So far, the currency has been included into the foreign exchange reserves of 75 countries and regions.
Third, China has constantly improved the international cooperation and infrastructure for the use of the RMB. Bilateral currency swap agreements and clearing banks for RMB business have been continuously expanded to facilitate the use of the RMB overseas.
Free trade zones across the country have expanded pilot zones for cross-border RMB business, and the Guangdong-Hong Kong-Macao Greater Bay Area has enhanced connectivity among financial markets in an orderly manner, gradually promoting the cross-border use of the RMB.
Besides, the country has made significant achievements in the construction of the Cross-border Interbank Payment System (CIPS), which makes cross-border use of the RMB more convenient.
While the global economy is still faced with uncertainties, the RMB is showing strong stability as a result of the resilience of the Chinese economy, the stable value of the RMB, and the constantly deepened international cooperation.
China’s economic and social systems have been really resilient in the face of the sudden COVID-19 pandemic and increasingly grim external environment. The country has not only made major strategic achievements in the battle against the virus, but achieved remarkable results in promoting economic and social development amid routine COVID-19 prevention measures.
Despite the impacts of the pandemic, the country has achieved positive growth in its real economy and foreign trade and seen record-high use of foreign investment, creating a good economic environment for the internationalization of the RMB.
The COVID-19 pandemic has caused tremendous turbulence for global financial markets and a drastically rising panic in market players. As central banks of major countries and regions have implemented super-loose monetary policies and carried out unconventional countercyclical operations to mitigate the impacts of the pandemic, China’s monetary policy has been kept within a normal range, and the interest rate and exchange rate of the RMB have remained relatively firm.
Since 2008, the PBOC has signed bilateral currency swap agreements with the central banks or other monetary authorities of over 30 countries and regions, covering major developed economies and emerging economies as well as main offshore RMB markets.
Bilateral currency swap not only helps promote trade and investment and guarantee liquidity in the supply of the RMB, but can increase the RMB’s risk resistance capacity, give a positive signal about the RMB to the world, and firm up overseas investors’ confidence in the RMB.