The head of the Chinese central bank has highlighted the key role that the One Belt One Road initiative will play in advancing internationalisation of the RMB.
In an essay recently published by the People’s Bank of China’s official media publication, central bank head Zhou Xiaochuan said that the One Belt One Road initiative would play a key role in expediting the usage of the Chinese yuan internationally.
Zhou writes in his essay on the “Joint Discussion and Establishment of a One Belt One Road Investment and Finance Cooperative” (共商共建一代一路投融资合作体) that internationalisation of the RMB is an intrinsic and indispensable part of the initiative.
According to Zhou use of the RMB for Silk Road projects will be of benefit to shoring up financial stability and raising the appeal of the Chinese yuan, as well as expanding the scope of capital markets that employ it as a unit of account.
Zhou said that this will also gradually reduce dependence upon the US dollar as primary currency, and reduce the risk associated with exchange rate fluctuations.
He expects that in future it will be increasingly possible to directly provide Chinese currency for repayments of financial debt, given the increasing use of the RMB to deliver returns on capital.
China has worked aggressively since the turn of the decade to advance internationalisation of the RMB, and participants in the One Belt One Road initiative figure prominently amongst counter parties involved.
Since 2008 China has signed currency swap agreements with over 30 different countries, of which 22 are countries participating in the Silk Road initiative, as well as performed direct currency transactions with 23 nations, of which 8 are One Belt One Road countries
China has also established local RMB settlement arrangements in 23 nations via designated local banks, of which 8 are One Belt One Road participants.
“Marketised” financing needed for Silk Road initiatives
In the same essay Zhou points out that methods such as preferential loans are not a sustainable means of supporting projects that are part of the One Belt One Road initiative, and has called for increased use of “marketised” financing.
The success of the initiative would require the support of the international community and increased emphasis on market-based financing, as opposed to just unidirectional fiscal support from governments.
According to Zhou the “concessionary” capital support that developing nations are wont to provide when it comes to finance and investment cooperation requires fiscal backing from governments, which makes it subject to the limitations of fiscal resources and legislative requirements.
The scope and term for such capital support is restricted, and can also trigger moral hazard or cause market distortions.
The PBOC head notes that the success of the One Belt One Road initiative will require large volumes of capital which will be difficult for governments or any individual nation to individually provide.
Consequently the effective supply or financing for the Silk Road initiative will require the “active promotion and establishment as well as continuous refinement of a marketised, sustainable, mutually beneficial investment and financing system.”