Internationalization of Renminbi: A Global Currency in the Making

The renminbi, China's official currency, is making a name for itself on the global stage. It's becoming a more prominent player in international trade and finance.

China's growing economic influence is driving the internationalization of the renminbi. The country's GDP has surpassed that of the US, making it the world's largest economy.

The renminbi has become a reserve currency, held by central banks around the world. This is a significant milestone, as it indicates the currency's growing acceptance and trustworthiness.

China's Belt and Road Initiative has also contributed to the renminbi's internationalization. The initiative aims to create a massive trade network connecting China with other parts of Asia, Europe, and Africa.

China's internationalization efforts are gaining momentum, particularly in the wake of Russia's invasion of Ukraine.

The renminbi has become a popular alternative currency for international payments, especially trade, and for private and official financing. Nearly 30 percent of services imports are already denominated in renminbi.

China is pushing the use of renminbi to pay for its imports, with a significant share of trade denominated in renminbi standing at 23 percent. The latest phase of renminbi internationalisation has also benefited from elevated US interest rates since 2022.

Many borrowers have turned to the renminbi for financing or refinancing, as shown by the sharp rise in the renminbi's share of Chinese banks' overseas loans and outstanding offshore bonds. The renminbi's share of Chinese banks' overseas loans has increased significantly.

However, there are areas where the international use of renminbi remains stagnant or is even decreasing, particularly in investment. The share of oil transactions in renminbi has not increased significantly, despite China being the world's largest oil importer.

The renminbi's internationalization is gaining momentum, with a significant increase in renminbi cross-border transactions starting in 2022, particularly after Russia's invasion of Ukraine.

The renminbi's growth can be attributed to China's pragmatic approach to internationalization, focusing on its trade and financing strengths, especially in relation to countries of the Global South.

China is encouraging countries to create or use the necessary infrastructure to facilitate renminbi settlement, such as renminbi regional hubs and swap lines between the People's Bank of China and other central banks.

The renminbi's potential to overtake the euro as the second most-traded currency after the dollar is also worth considering, given the euro's less liquid and integrated markets.

The renminbi's use to fund emerging economies, either through official funding or renminbi-denominated lending, may have significant implications for the international monetary system.

The renminbi's globalization index shows a sustained increase in offshore RMB usage over the past few years, with most progress made in its use for trade settlement and direct investment purposes.

However, the use of the RMB as an international funding and reserve currency remains in its early stages, but prospects for its internationalization remain strong, supported by ongoing policies and reforms.

The Renminbi (RMB) is becoming a widely accepted currency for international trade and investment. In 2014, close to 20 percent of China's goods trade was settled in RMB.

China's rapid rise as a trading nation has led to a significant increase in the use of RMB for cross-border trade invoicing and payment. Since 2009, the RMB settlement portion of China's goods trade has grown rapidly.

The benefits of using RMB for cross-border trade are mutual, with nonresident buyers enjoying better pricing and Chinese entities having more security against currency risk. In 2015, the RMB settlement portion of China's goods trade rose nearly 10½ percent over the previous year.

In addition to trade, RMB is also being used for direct investment payments. Since 2011, direct investment payments have been permitted in RMB, and the currency is rapidly advancing as the choice for settling direct investment payments. Nearly 30 percent of FDI transactions were settled in RMB in 2014.

The Renminbi (RMB) has made significant strides in becoming a global financial instrument. The RMB has been permitted for direct investment payments since 2011, and its use has grown rapidly, with nearly 30 percent of foreign direct investment (FDI) transactions settled in RMB in 2014.

The RMB is increasingly being used in cross-border payments, reflecting the growth of the Chinese economy and its interconnectedness with the rest of the world. In 2015, the RMB settlement portion of China's FDI and outward direct investment increased 65.2 percent and 228.1 percent over the previous year.

Offshore RMB bonds, also known as "dim sum" bonds, have become a popular financial instrument, with several corporate issuers and governments tapping into RMB funds in the offshore market. The first RMB-denominated bond was issued by China Development Bank in Hong Kong SAR in July 2007.

Offshore Deposits in RMB have grown significantly since 2004, when licensed banks in Hong Kong SAR began accepting RMB deposits to support mainland tourism and remittances.

Offshore RMB deposits rose to RMB2.3 trillion in 2014, a 23-fold increase from about RMB100 billion in 2010.

The appreciation of the RMB against major currencies over this period contributed to the rapid growth of offshore RMB deposits.

Offshore RMB deposits peaked at RMB2.3 trillion in 2014 but have since dropped to around RMB1.3 trillion in mid-2016.

The growth of offshore RMB deposits was driven by corporate deposit growth, which accelerated after cross-border trade settlement in RMB was permitted in 2009.

Offshore bonds, also known as "dim sum" bonds, have been a key driver of the growth of the offshore Renminbi (RMB) market.

They were initially restricted to mainland policy and commercial banks, starting with China Development Bank listing in Hong Kong SAR in July 2007.

China's own sovereign issuance in Hong Kong SAR has been an important driver of the market since the first auction took place in September 2009.

Several corporate issuers, including foreign firms such as McDonald's, Volkswagen, and Caterpillar, have tapped RMB funds in the offshore market.

Issuance has since spread to centers outside Asia, such as London, where HSBC issued the first RMB-denominated bond in April 2012.

The International Finance Corporation issued the largest London-listed RMB bond, worth RMB1 billion, in September 2014.

The United Kingdom issued its first RMB-denominated sovereign bond, raising RMB3 billion, in October 2014, indicating the proceeds would be held as foreign exchange reserves.

Market participants note the large volumes in cross-currency swaps involving offshore RMB and the emergence of the cross-currency swap curve as a key offshore RMB benchmark interest rate curve.

Regression analysis by Law (2016) confirms that the net issuance of dim sum bonds has been mainly driven by expectations of RMB appreciation.

China's swift rise as a trading nation has positioned it as the single-largest trading partner for Asia and sub-Saharan Africa, and the second-largest trading partner for the European Union, the United States, and Latin America.

Since its introduction in 2009, the use of RMB for cross-border trade invoicing and payment has grown rapidly. Nearly 20 percent of China's goods trade was settled in RMB in 2014.

The RMB settlement portion of China's goods trade rose nearly 10½ percent over the previous year in 2015, while other current account transactions rose close to 28½ percent. This growth reflects the mutual benefits of RMB use, such as better pricing for nonresident buyers and more security against currency risk for Chinese entities.

Among the factors driving this growth are more efficient cash flow management and lower transactions costs for both sides. The use of RMB in cross-border payments has become increasingly popular in recent years.

The Chinese authorities have implemented policy reforms to encourage RMB internationalization, including gradual steps to develop functioning markets and move to market-determined prices and interest rates.

To promote RMB internationalization, policy measures have focused on three main areas: gradual opening of the capital account, strengthening the domestic financial system, and offshore liquidity support.

The capital account has been gradually opened, with regulations shifting from preapprovals to registration and ex post monitoring for certain direct investment transactions.

The State Administration of Foreign Exchange (SAFE) tracks each transaction and follows up with banks on aberrant transfers to curb money laundering, terrorist financing, and tax evasion.

Policy measures have also included improvements to cross-border payments infrastructure and central bank swap lines to support offshore liquidity.

The authorities aim to minimize disruptive short-term capital flows, contain currency and maturity mismatches, and exercise tight supervision to achieve these goals.

Table 9.1 provides a timeline of the policy measures implemented to support RMB internationalization, showing the progress made in each of these areas.

The infrastructure and inclusion aspect of the internationalization of renminbi is crucial for its global adoption.

The renminbi's inclusion in the IMF's Special Drawing Rights (SDR) basket in 2015 marked a significant milestone, allowing it to be used as a reserve currency.

China has been actively promoting the use of renminbi in international trade, with the goal of increasing its share of global transactions.

By 2020, renminbi-denominated trade had reached 2.4 trillion yuan, accounting for about 10% of China's total trade.

The Belt and Road Initiative (BRI) has played a key role in promoting the use of renminbi in international trade, with many BRI countries using the currency in their trade with China.

As of 2020, 26 countries had signed agreements with China to use the renminbi in their trade, including major economies like Russia and Brazil.

The renminbi's inclusion in international payment systems, such as the Cross-Border Interbank Payment System (CIPS), has also facilitated its use in international trade.

CIPS, launched in 2015, has processed over 1 trillion renminbi in transactions since its inception.

The renminbi's growing use in international trade and finance has also led to an increase in renminbi-denominated bonds issued by foreign governments and companies.

By 2020, foreign issuers had raised over 100 billion renminbi through renminbi-denominated bonds in the Chinese market.

The international monetary system (IMS) is about to get a major shake-up with the internationalization of the renminbi. The renminbi's share of Chinese banks' overseas loans and outstanding offshore bonds has seen a sharp rise, as borrowers have turned to the renminbi for financing or refinancing due to elevated US interest rates since 2022.

This is largely driven by the higher costs of borrowing in dollars, which has led many to seek alternative financing options. The renminbi's share of Chinese banks' overseas loans has increased significantly, as shown in Figure 11.

However, not all areas are seeing the same level of growth. The share of oil transactions in renminbi, for instance, has not seen a significant increase, despite China's status as the world's largest oil importer and its specific arrangements for renminbi settlements with major exporters.

China's efforts to foster the use of renminbi as an alternative currency for international payments, especially trade, and for private and official financing, are also worth noting. Nearly 30 percent of services imports are already denominated in renminbi, and China's trade in goods denominated in renminbi stands at 23 percent, according to China's State Administration of Foreign Reserves (SAFE).

The internationalization of the renminbi has made significant progress in the past decade, expanding through the offshore market in Hong Kong SAR.

China's cross-border trade and direct investment transactions are now widely settled using the RMB as a payment currency.

The RMB's internationalization is ultimately market driven, which means its progress will be determined by market forces rather than government intervention.

While RMB use and trading are increasing, the currency still has a long road ahead before it becomes an international funding currency and acquires the attributes associated with a global reserve currency.

The RMB has made significant progress in internationalization over the past decade, with a substantial expansion through the offshore market in Hong Kong SAR.

This growth has led to the RMB being widely used as a payment currency for settling China's cross-border trade and direct investment transactions.

However, the RMB still has a long road ahead before it becomes an international funding currency and acquires the attributes associated with a global reserve currency.

Progress in this area will ultimately determine its broader role in the international monetary and financial system.

The Renminbi, China's official currency, is expected to continue its upward trajectory in the coming years. Its increasing global usage is a major factor in this growth.

China's trade surplus has contributed to the Renminbi's appreciation, with a significant portion of its exports being denominated in the currency. The country's large trade surplus is expected to remain a driving force behind the currency's value.

The Renminbi's inclusion in the IMF's Special Drawing Rights (SDR) basket in 2015 has also boosted its global status, making it a more widely accepted and traded currency. This inclusion has increased the Renminbi's appeal to investors and traders alike.

China's central bank, the People's Bank of China, has been actively managing the currency's exchange rate to prevent sharp fluctuations, which has helped maintain investor confidence.

The renminbi's journey to global currency status is a slow but steady one. In 2019, just under 2 percent of the world's foreign exchange reserves, worth around $11 trillion, were denominated in renminbi.

While growth has been gradual, the renminbi has made significant strides in the past few years. In 2016, less than 2 percent of foreign exchange reserves were in renminbi, so we've seen a slight increase.

The majority of foreign exchange reserves remain in US dollars, making up over 60 percent, while the euro holds around 20 percent. This shows that the renminbi still has a long way to go to catch up with these established currencies.

Since 2011, the renminbi has gained traction in international payments, but the growth has been modest. By 2015, its usage had expanded to nearly 2.8 percent, but it has since declined slightly and hovers around 2 percent.