China’s 20th Party Congress Mentions to Internationalise Renminbi

China’s 20th Party Congress Mentions to Internationalise Renminbi

While other countries see China as a country that closes all doors in terms of its politics, especially after the outbreak of Covid-19, Xi states in the China’s 20th Party Congress that they are trying to internationalise Renminbi. 

In the view of Zhao Xue'er, a researcher at the Bank of China Research Institute, the reasons to make RMB international in the 20th National Congress report are mainly from two aspects.

On the one hand, there are security considerations. At present, the external environment has become more complex and severe, with intensified competition and games among major powers, rising geopolitical risks, and a significant increase in financial volatility. Especially this year, the systemic flaws of the international monetary pattern are deeply exposed, and the spillover effects of the Fed's monetary policy have increased. The orderly promotion of the internationalization of the RMB and the increase in the use of local currency is not only due to China's security considerations, but also fits the current environment of the adjustment of the international monetary pattern.

On the other hand is the development requirements. Finance is the bloodline of the economy. The internationalization of RMB is conducive to China's efficient use of domestic and foreign markets, allocation of global financial resources, service of modern technology and industrial development, and enhancement of the influence and control of macro policies.

ICBC International Chief Economist Cheng Shih mentioned three factors in an interview with China News Service. Firstly, it is in line with the current trend, as the demand for RMB has been growing in recent years from enterprises, individuals and financial institutions.

Secondly, the internationalization of RMB is conducive to supporting the real economy. The internationalization of RMB is conducive to trade and investment facilitation in the new development pattern of a domestic and international cycle.

Finally, the promotion of RMB cross-border payment systems, rich RMB wealth management products, active RMB derivatives trading and the use of digital RMB will not only help strengthen Hong Kong's position as an international financial center, but also promote the construction of the Pilot Free Trade Zone, Guangdong, Hong Kong and Macao Greater Bay Area and Shanghai as an international financial center.

"In the past few years, with market-driven and policy support, the foundation of RMB internationalization has been further strengthened." Zhao Xue'er said. Official figures show that nearly half of the total cross-border transactions carried out by Chinese financial institutions, enterprises and individuals are now settled in RMB; as of the end of the second quarter of 2022, the size of RMB reserves held by global central banks was US$322.38 billion, accounting for 2.88%, up 1.8 percentage points from 2016, when RMB first joined the SDR (Special Drawing Rights); major offshore RMB market deposits nearly RMB 1.5 trillion, RMB-denominated financial products becoming more abundant ......

The past decade has been a decade of steady development of RMB internationalization, said Cheng Shi. The exchange rate of RMB is expected to remain stable despite a series of exogenous shocks such as global epidemic outbreaks, US interest rate hikes and geopolitical conflicts, and with the opening of China's financial market and the rapid development of the offshore markets in Hong Kong and London in recent years, the safety and hedging properties of RMB assets have been further strengthened under the global turbulence. There is still room for RMB to increase its share in global payments and foreign exchange reserves.

What should be the path of RMB internationalization? The company's main business is to provide a wide range of products and services to the market. "Becoming an internationalized currency can reduce the transaction costs of overseas investment and financing, but it also means that overseas investment can be fast in and fast out, the market fluctuations will be very large, you have to withstand a lot of impact from the flow of external capital."

As Zhao Xue'er said, in the future, China needs to seize the opportunities and resist the risks amid the changes, and promote the internationalization of RMB in an orderly manner. She mentioned that it is necessary to return to the origin of RMB internationalization and enhance the quality and effectiveness of serving the real economy; integrate and optimize financial opening channels and promote the development of positive interaction between onshore and offshore markets; seize the opportunity of the change of the times to strengthen the new dynamics of RMB internationalization; and strengthen the monitoring and management of short-term capital flows.

In particular, she mentioned that in the coming period, China should assess the progress of capital account liberalization in depth and build a financial security barrier in accordance with the domestic situation. In the face of potential external shocks, prudent design of liberalization tools, improve the cross-cycle adjustment mechanism and cross-border capital flow management.

Cheng Shi suggested that China could actively explore further bilateral cooperation in local currency settlement with Eastern Europe and ASEAN countries to enhance the payment, settlement and reserve functions of RMB in their markets. China needs to continue to improve and innovate the offshore RMB liquidity supply mechanism, enrich and improve the offshore RMB market products and services mechanism, and deepen the in-depth collaboration between the offshore RMB investments market (e.g. Hong Kong and London) and the onshore market.