Representatives of China Construction Bank announce the issuance of 1 billion RMB bond at the London Stock Exchange on Oct. 21. This is the first time the bank has issued a bond denominated on the RMB in London market.

The rise of the RMB as a major global currency, like the birth of the euro, is considered a milestone of the 21st century that will profoundly shape the world monetary pattern and the entire world economic order in the future. The internationalization of the RMB is not only a purely unilateral behavior but also an open process that requires the support and cooperation of other countries. From this perspective, the emergence of the RMB is a diplomatic rather than purely economic process.

RMB partnership
Since the end of 2008, the Chinese government has carried out monetary diplomacy focused on the internationalization of the RMB, and a multi-layered network of monetary partnership has been established. Relatively sophisticated, the network constitutes the important political base for the rise of the RMB. Some countries, as key nodes in the network, play essential roles in the process of RMB internationalization.
 

Countries that could be identified as strategic hubs for a certain currency are those that are able to provide important support for its evolution into a global currency. For the RMB, such pivotal countries usually have the following characteristics. First, the country itself must have economic strength and be engaged in large-scale external economic activities. This enables the country to support the RMB as a global currency by facilitating its circulation.
 

Furthermore, the country must play a crucial role in a certain region so that its support for the RMB is able to encourage the usage of the RMB by other regional countries. Also, the country must be home to globally or regionally influential financial centers that are able to aid the circulation of the RMB.
Additionally, the country should be an exporter of a certain staple commodity, such as oil. Since the valuation of staple commodities, especially oil, has always been animportant criterion for measuring a global currency, a country that primarily exports oil could support the RMB as the medium of accounts and settlement for its export commodities.
 

In addition to support capacity, the willingness to collaborate is also another identifier of a critical partner for a certain currency. This is mainly affected by two factors—economic interest and political friendliness.
 

Five pivotal countries
According to the aforementioned criteria, there are five countries that could be regarded as the strategic hubs for the network of monetary partnership that China has established—South Korea, Britain, Singapore, Russia and the United Arab Emirates.
 

South Korea is now turning into a model partner in China’s transnational monetary cooperation, so it has the potential to play an exemplary role in China’s monetary partnership with other countries. In terms of support capacity, South Korea is the 14th-largest economy in the world and has set a good example for emerging countries in terms of industrialization. It is also the country with the seventh-biggest trade volume and is the only country that has free trade agreements with both the United States and the European Union. If South Korea uses the RMB extensively in its trade and investment sectors as the unit of currency, the amount of RMB usage worldwide would dramatically increase. South Korea has the motivation to use the RMB in its foreign economic activities, especially those between China and South Korea. Currently, China is the largest trading partner of South Korea so the usage of the RMB will bring the country more economic benefits.
 

The signing of China-South Korea FTA this June will further foster trade ties between the two. In this context, for the enterprises in South Korea, the usage of the RMB will lower the risks brought by exchange rate fluctuation. Since the financial crisis in 2008, the South Korean government has sought to diversify its growing foreign exchange reserves.
 

And the reserve of certain amounts of the RMB could definitely help South Korea alleviate the risks posed by an overreliance on the US dollar. Also, the sound political bond between China and South Korea allows the governments to foster monetary cooperation. During Premier Li Keqiang’s recent visit to South Korea, a series of important treaties were signed, ensuring the country’s willingness to promote the internationalization of the RMB.
 

Britain, a traditional economic and political power, is also expected to become a hub for RMB internationalization. The China-UK partnership has always been on the frontier of China’s monetary cooperation with European countries. The birthplace of the Industrial Revolution, the United Kingdom remains the world’s sixth-biggest economy and has the eighth-largest trade volume.

Because it is one of the core countries on the European continent, the United Kingdom’s usage of RMB might encourage other European countries, even developing nations in other regions, to follow suit, especially in the trade and investment sector. More importantly, London is a first-class global financial center with relatively complete market rules and strong intellectual property protections, which are conducive to the long-term development of RMB business.
 

Currently, China is the United Kingdom’s second-largest trade partner outside the EU zone. The frequent trade between the two encourages the EU to lower its currency exchange risks through the RMB.
 

Years ago, the United Kingdom strengthened its prestige as a global center by successfully grasping the chance to act as the offshore center for the US dollar. Today, British people have no reason to be passive or blind to the similar historical opportunity.
 

In addition, the favorable political interactions between China and the United Kingdom has laid a good foundation for their monetary cooperation. In October, Chinese President Xi Jinping visited Britain, and some new breakthroughs were made between the two countries in the financial sector.
 

The People’s Bank of China issued a 5 billion RMB note, the first such debt issued by the central bank through an RMB bond outside of China. The two parties also agreed to renew the reciprocal currency swap line between British pounds sterling and the RMB. It was also announced that they would study the feasibility of linking the countries’ stock markets, particularly the Shanghai and London stock exchanges. These strategic moves bolstered the confidence of London as a leading RMB hub.
 

Singapore is now growing into another potentially important RMB hub with its advantaged geographical position and financial power compared with China’s other neighbors. Since Singapore is the only global financial center of the ASEAN, RMB business in the country has the potential to cover the entire Southeast Asia region, which is populated by more than 500 million people. Moreover, Singapore’s rich experience and personnel resources of foreign exchange transaction are beneficial to the country’s offshore RMB business. As one of the crucial global centers of private banking, property management and staple commodity exchange, Singapore has great advantages in facilitating the development of the RMB business across the world.

And the country itself is also quite pleased to act as a hub for the regionalization of RMB. As the third-largest trade partner of China and one of the few countries that have a trade surplus with China, Singapore will reduce its currency exchange cost and risks in trade through RMB usage. Furthermore, Singapore is now competing with London to be the second-largest offshore RMB business center.
 

Russia, an important supplier of global energy market, also has the potential to become pioneer of accepting RMB to settle oil transactions. Russia is the world’s eighth-largest economy and the country with the tenth largest trade volume. Currently, China and Russia are expanding their oil settlement in home currency, which will help enlarge the international network of RMB usage. What is more important is that since Russia is now one of the chief oil-exporting countries, and China is one of the main oil importers, the adoption of home currencies for the settlement of oil transactions will undermine the US dollar’s dominant role in the oil trade. Several years ago, the US ensured the popularity of its currency in the international oil market by signing secret agreements with the world’s largest oil producer and exporter Saudi Arabia, which thus guaranteed the US dollar’s status as the most important global currency. Today, China is also expected to bring RMB to the oil and natural gas trade to advance the internationalization of the RMB.
 

Russia’s strategic competition with the US and its frequent trade with China provide a strong incentive to conduct RMB business. Economic and financial sanctions by the US and the Europe have intensified Russia’s sense of urgency to end the dominance of the dollar. Therefore, China and Russia are able to support each other on the international monetary stage and resist the dollar’s hegemony through cooperation.
 

Since the United Arab Emirates was the first Middle Eastern country to start monetary cooperation with China, the UAE is also expected to be a gateway for the RMB to enter the Middle East. With Dubai and Abu Dhabi as the two major global financial centers, the UAE has a mature financial network that is conducive to the operation and circulation of RMB-denominated bonds, funds and other assets. The currency swap agreements reached between China and the UAE, a significant oil producer in the Middle East, is an important attempt to promote the use of the RMB in oil trade.
 

In addition, UAE’s friendly political attitude toward China provides a favorable environment for monetary cooperation. Unlike Saudi Arabia, the UAE is not a quasi-ally of the US in the Middle East region. The neutral, non-aligned and friendly foreign policy that the country advocates means the UAE has much potential to play a vital role in the internationalization of the RMB.
 

Li Wei is from the School of International Studies and the National Academy of Development and Strategy at Renmin University of China.