However, China is under pressure to liberalize its capital account and allow freer flows of capital as it tries to raise its international influence. Under the current international monetary system IMS , the USD is the dominant invoicing, investment, and reserve currency in the world. The system is highly asymmetric, in the sense that most countries want to maintain a stable exchange rate with the USD by intervening in the foreign exchange market, while the US does not need to worry about the value of its own currency relative to others.
Any drastic depreciation of the USD can lead to huge losses to China. In the long run, China wants the currencies of its main trading partners to be pegged to the RMB, while the RMB itself is pegged to this super-sovereign reserve currency. Whether or not the SDR will become a widely accepted reserve currency, China wants the RMB to be one of the major reserve currencies of foreign central banks.
To China, although this is going to be a long process, now is a good time to push for reforming the IMF given that people still have a fresh memory of the global financial crisis, during which the world suffered from a shortage of USD due to the credit crunch, followed by a large depreciation of the USD due to quantitative easing.
However, the RMB is not convertible in the capital account. Thus, establishing offshore RMB markets with the help of government policy is crucial in encouraging the international use of the RMB. In this vein, the Chinese government has taken the following steps: allowing and facilitating RMB to be used to settle trade and denominate offshore financial instruments e.
The addition of the renminbi to the SDR basket in October marked a major milestone for China, as it elevated the renminbi to a position alongside the dollar, euro, yen, and pound. China has undertaken several additional measures to better enable international usage of the renminbi. Dim sum bonds, for example, allow investors to purchase renminbi-denominated assets outside of mainland China, where they are subject to fewer restrictions.
Since first appearing in , the dim sum bond market has experienced large swings as a result of economic policy changes from Beijing. Other initiatives include allowing inward and outward foreign direct investment to be cleared in renminbi and establishing London as the biggest renminbi trading hub outside of China.
Renminbi internationalization began just over a decade ago, and its limited progress has come at a relatively low cost. Carving out a greater role for the renminbi in the global marketplace will require Chinese leaders to more aggressively pursue reforms and make difficult tradeoffs between the benefits of currency internationalization and the costs of loosening economic controls.
Strict capital controls hinder the development of Chinese financial markets and restrict the movement of renminbi across the world. Liberalizing capital controls would allow for greater capital flows into and out of China, but it would also expose the Chinese economy and the renminbi to greater volatility.
This is especially true given that the Chinese financial system remains underdeveloped. To forestall economic volatility, Beijing has favored a very gradual loosening of capital controls, often at the expense of greater renminbi internationalization. After China devalued the renminbi in August , it was also compelled to tighten restrictions to avoid a rapid outflow of capital in anticipation of an even greater depreciation.
The move was successful at staunching capital flight, but it greatly reduced international confidence in the renminbi, as well as the prospects for further liberalization. Cross-border settlement of renminbi fell sharply as a result, from an all-time high of RMB 2. Political concerns pose additional obstacles to renminbi internationalization.
As the global center for renminbi clearing, Hong Kong plays a critical role in renminbi internationalization. Sustained political unrest within the Asian financial powerhouse could have a sizable effect on the global standing of the renminbi. Establishing an international financial center elsewhere could help alleviate these risks.
While Chinese officials claim the FTZ has made advances toward transforming the city into a financial hub, concerns about the health of the Chinese financial system remain serious obstacles to long-term success. It is also difficult to displace established currency leaders.
The dollar — and to a lesser extent the euro — are already deeply ingrained within the existing international trade and monetary systems. As a relative newcomer to the international scene, the renminbi will have to gain the confidence of investors, businesses, and governments before it can expand its international standing.
That said, progress has been unremarkable and unstable. The Belt and Road Initiative is, however, projected to be completed by and is, therefore, only in its early steps. Whether or not the BRI, in conjunction with Chinese monetary policy, leads to an international RMB depends on a number of factors, not least of which is the evolution of confidence in competing internationalized currencies.
Lindsay Thill on LinkedIn. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. This site uses Akismet to reduce spam. Learn how your comment data is processed. Zhou, , p. Even if the US dollar is not mentioned, it is clear that proposing a reform of the IMS means questioning the supremacy of the US currency. The most important was the inauguration of several offshore centers for transactions with the Chinese RMB.
The first centers inaugurated, part of a pilot project, were previous to the crises Hong Kong, the first and still the most important one was established in Since , twenty-two new centers were inaugurated worldwide. The location of these centers reveals careful attention for regional distribution, with centers in Asia, Oceania, Africa, Western and Eastern Europe, North and South America.
These centers are allowed to develop operations in RMB through authorized banks, which in almost all cases are Chinese. This is significant because the internationalization of a currency may be fostered by the internationalization of the national banking system and in the Chinese case both are being made simultaneously.
After the first phase of tests, all barriers for the usage of RMB in foreign trade were eliminated in In parallel, bilateral agreements have been signed with several countries notably in Asia to stimulate trade in the local currencies, circumventing the necessity of using the US dollar. Gradually, but unquestionably, the Chinese government was amplifying the range of international operations allowed to be settled in its national currency.
In addition, many swap agreements were implemented by China, creating a direct channel for the provision of liquidity in RMB for countries in need. Yet, the Chinese monetary authorities are aware of the risks involved in making these moves without changing the platforms in which the operations are done — the recent sanctions imposed by the USA over Russia and Iran are very eloquent in showing that.
Another critical maneuver is not a Chinese novelty and consists of the joint initiatives for the denomination of oil barrels prices in RMB. Historically, the US government has strongly impelled the denomination of energy commodities in dollar. This analogous Chinese move will certainly provoke significant geopolitical agitations ahead.
Finally, it is also worth mentioning an initiative with no operational consequences, but which is non-negligible in symbolical terms. China is using advertising campaigns in strategic spots worldwide e. It is therefore quite clear that the Chinese government is deeply engaged in the effort of internationalizing its currency. Naturally, these actions may be conjugated with other policies related to the external front.
0コメント