Internationalization of the RMB
A demonstration street for digital payments in Boao Town, Hainan Province, April 18, 2022 Photo: CFP
As an important direction in China’s financial opening up, RMB internationalization refers to the process of the RMB crossing national borders, circulating outside of China, and becoming an internationally recognized currency for valuation, settlement, and reserve. What are the opportunities and challenges facing the internationalization of the RMB? Where will the internationalization of the RMB go?
Opportunities and challenges
The RMB’s internationalization is necessary. Feng Yongqi, a professor from the School of Economics at Jilin University, said that the current international environment highlights the necessity of RMB internationalization and provides development opportunities for internationalization, especially enhancing the status of the RMB as a foreign exchange reserve.
Rolf Langhammer, a professor from the Kiel Institute for the World Economy in Germany, said that the world economy is close to falling into a recession, or a “stagflation,” with low growth and persistent inflation, hindering the process of RMB internationalization.
Accelerating RMB internationalization
International trade is an important force driving the internationalization of the RMB. Alicia Garcia-Herrero, a senior fellow at the Belgian think tank Brugel, said that in 2003, Stanford economist Ronald McKinnon proposed four key characteristics for an international currency, namely—medium of exchange, store of value, unit of account, and standard of deferred payment. These are the basis for studying the RMB internationalization trend. China’s exports have experienced rapid growth since the outbreak of the COVID-19 pandemic. RMB internationalization’s advancement has been accompanied by the continued growth of cross-border payments processed through the RMB Cross-border Interbank Payment System (CIPS) since the third quarter of 2020. The latest data shows that the RMB rose to the 4th place in international payments as of December 2021, surpassing the Japanese yen. In addition, geopolitical risks add urgency to the development of digital currencies, which will also advance the internationalization process. However, Garcia-Herrero said that although the scale of RMB use in outbound direct investment has grown significantly, there is still more room to improve the usage scale compared to the scale of China’s economy.
Feng said that in terms of specific measures, efforts should be first of all made to enhance the resilience of the domestic financial system and improve the degree of the domestic financial market’s development. Currency internationalization essentially depends on the development of the domestic financial market. Second, we should steadily promote high-quality capital account opening as well as the financial industry’s opening up based on related institutions. Third, we should accelerate the establishment of an internationally recognized and securely operating RMB payment and settlement system and other financial infrastructure. By continuously accelerating our connection with other countries’ payment systems, and building a RMB cross-border payment system, the independent operation capacity and international influence of China’s international payment system will be enhanced. Fourth, we should promote the internationalization of the RMB under the US dollar system. The internationalization of the RMB doesn’t seek to eliminate or subvert the US dollar system, but to reduce the risks brought by using a single system. In the future, through the process of RMB internationalization, we should make full use of favorable international economic and political factors and seek more opportunities to promote the development of RMB internationalization.
Edited by ZHAO YUAN