The Hong Kong Monetary Authority has announced that renminbi (RMB) deposits in Hong Kong increased by 18.2%, amounting to RMB 1.0959 trillion at the end of January, once again broke through the record trillion yuan since December 2014 and hit a new high. After the reform of the RMB exchange rate, the scale of the offshore RMB market has been restored, hence shaping a relatively complete market cycle. This is of great significance towards RMB internationalization. As discussed by financial analysts, the internationalization of RMB is currently heading towards a new period of strategic opportunities. Economists at ANBOUND note that it is still necessary to adhere to an open and rational attitude in order to catalyze the development of RMB internationalization.
The recovery of the offshore RMB pool is closely linked to the current appreciation trend of the RMB exchange rate. This is especially true when the offshore RMB deposits have declined along with RMB depreciation after the RMB exchange rate took the reform. However, China’s economy fundamentally remains stable, and the capital market is progressively opening-up. The RMB exchange rate poses to a two-way volatility as well. RMB appreciation has been clearly seen, starting from the second half of last year 2021. The risk-averse nature of the RMB has emerged when the markets are now in the complex and volatile state. It is facilitating the recovery of the offshore RMB pool. This enables the status of Hong Kong to be expected for further consolidated and enhanced by acting as a global RMB offshore center. It also implies that the internationalization of the RMB has re-ushered in further development opportunities.
Judging from the present international monetary environment, it is indeed favorable to RMB internationalization. On one hand, we observe that inflation continuously surges when quantitative easing took place in major economies, including the United States and Europe. This in turn, has had an impact on the value of these major trading currencies. Comparatively, under China’s relatively stable currency policy, inflation and interest rate can be at the steady level. The stability of RMB value will escalate the attractiveness of adopting RMB in trade settlement. On the other hand, as the opening of China’s capital market is accelerating, a growing number of international investment institutions regard it as an essential part of the investment portfolio that achieve their goals of diversifying risks and obtaining stable returns. Thus, the demand for RMB has increased and enabled offshore RMB market to zoom in. In view of the above two aspects, the stability and opening of the Chinese economy act as the foundation to facilitate the internationalization of RMB, which is keeping RMB value, reducing the constraints and restrictions on the use of the RMB. From the attempts to opening the trading account to the opening of capital account, the basis to boost the internationalization of RMB includes the adjustment of the RMB exchange rate mechanism, and the establishment of the capital market interconnection mechanism. Therefore, the hype and speculation could be prevented during the RMB internationalization process, so that the basic goals of stable exchange rate and ordered capital flow would be achieved. In the future, the acceleration of RMB internationalization is complementary to the openness of China’s domestic capital market and capital account. All these factors are interconnected with the progress of RMB internationalization. The necessity is to apply a rational attitude towards RMB internationalization without taking an action single-handedly.
Due to the recent crisis between Russia and Ukraine, countries such as Europe and the United States have removed some Russian financial institutions from the SWIFT system, the exchange infrastructure for international banks. The market set an expectation that China’s cross-border RMB settlement system CIPS could take this opportunity to play a role in achieving the expansion of RMB internationalization. As an international financial infrastructure, SWIFT has shown a hike in politicized tendency. There indeed converts to a long-term opportunity to promote CIPS system and expand RMB internationalization. It also implies the acceleration of global de-dollarization. However, SWIFT is difficult to be replaced in the short term. Although the RMB ranks high among the global payment system, the weightiness is still far behind from the currencies such as the U.S. dollar and the euro. It is difficult to fully rely on CIPS to meet the current huge demand for U.S. dollar and euro transactions. Similarly, in the case of intensified geo-financial competition in the future, the CIPS system will face restrictions or sanctions again from the United States and Europe, hence it is required advanced preparation.
A point to be aware is that the CIPS system is also a fundamental financial facility, with a positive significance by its continuous improvement and expansion to construct China’s geo-financial influence. The system cannot be only considered from a technical perspective, also in terms of promotion method and connectivity with other transaction settlement systems. During this procedure, it is necessary to adhere to the principle of openness, maintain the connection with SWIFT and remain open to other trading systems. This system should not only satisfy cross-border settlements of RMB, but also be available for multi-currency settlements to increase transaction volume and market share of RMB. Technical consideration for financial infrastructure improvement is still a priority for the establishment and promotion of CIPS. In addition, it should keep eyes on the higher international use and demand of RMB. The continuous expansion of the offshore market and the enhancement of the onshore market will achieve its active connectivity and interaction.
The progress of RMB internationalization should not merely aim for the globalization of the currency, but rather it needs to take China’s economic and financial strength into consideration. It would be necessary to implement it without rush. In view of the overall current trends in the development and changes of the international monetary system, ANBOUND’s economists concluded that the exchange system is evolving from a single currency system dominated by the U.S. dollar to a more geo-localized and diversified currency system. As part of geo-currency, the RMB holds room to fulfill internationalization, while matches along with China’s own geographical and economic influence. The capability either surpass or insufficient, is harmful to China. The internationalization of the RMB is a process in which the currency system shifts from closed to open. It is necessary to maintain an extensive and inclusive yet open attitude. This would mean that the relevant authorities should neither intervene too much in the market due to exchange rate fluctuations, nor to engage in any “small clique”, but to truly accomplish the interconnection between RMB and other international currencies.
Final analysis conclusion:
In the context of the growing international economic fluctuations and increasingly complex monetary environment, China’s macroeconomic and financial stability has brought new opportunities for RMB internationalization. Fundamental attitudes toward this should be openness, inclusiveness, and rational development under the obvious escalating trend of currency geo-politization.
Wei Hongxu
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