Renmin U. Professor Says US Dollar Credibility Damaged by COVID-19, Outlines Roadmap for Yuan Internationalisation

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The Chinese central bank has just released the “2020 Renminbi Internationalisation Report” (2020年人民币国际化报告), stoking further discussion in official circles about efforts to expand offshore usage of the Chinese currency in the wake of the COVID-19 pandemic.

In the Report released on 14 August the People’s Bank of China (PBOC) committed to “steady in­ter­na­tion­al­i­sa­tion of the yuan to serve the real econ­omy in ac­cor­dance with mar­ket prin­ci­ples.”

In an article written for PBOC’s official news publication Tu Yonghong (涂永红), deputy-head of the International Monetary Research Institute at Renmin University, highlighted recent efforts to expedite internationalisation of the renminbi.

According to Tu Chinese regulators have already succeeded in:

  1. Establishing a policy framework for cross-border renminbi usage. Tu said that China has “basically removed impediments to the usage of the renminbi for cross-border trade, investment and financing and worked hard to reduce cross-border usage of the renminbi.”
  2. Bilateral opening of financial markets, and a high-degree of capital account opening. “Financial transactions have become a strong force for advancing the internationalisation of the renminbi…over the past several years PBOC has continually driven high-level opening of China’s financial markets and expanded cross-border investment channels. Direct market entry channels include QFII/RQFII and direct entry by offshore investors into the interbank bond market, while reciprocal mechanisms include Shanghai-Hong Kong Connect, Shenzhen-Hong Kong Connect, Bond Connect and Shanghai – London Connect.”
  3. Continually driving the creation of the infrastructure for renminbi internationalisation, and rational arrangements for offshore renminbi settlement based on market demand. As of the end of 2019 settlement arrangements already covered 25 countries, while PBOC authorised MUFG to be the renminbi settlement bank for Japan, and authorised Bank of China’s Malaysian and Philippine branches to be regional settlement banks in September. According to the Report, in 2019 China’s CIPS system processed 1.884 million cross-border renminbi transactions, for a YoY rise of 31%, while their total value was 33.9 trillion yuan, for a YoY rise of 28%.
  4. Further strengthening cooperation with other monetary authorities, raising the investment reserves function of the renminbi. In 2019 PBOC executed a bilateral currency swaps agreement with the Macau monetary authority worth 30 billion yuan, as well as similar agreements with the central banks of Suriname, Singapore, Turkey the EU and Hungary, worth 683 billion yuan in total. As of the end of 2019 PBOC had executed bilateral currency swaps agreements with 39 monetary authorities or central banks, with a total amount of over 3.7 trillion yuan.
  5. Actively driving the usage the renminbi by Belt and Road Nations. According to the Report as of the end of 2019 China had executed bilateral currency swaps agreements with 23 Belt and Road-affiliated nations, while in 2019 China processed over 2.73 trillion yuan in cross-border transactions with such countries, for a YoY rise of 32.%.

Tu Yonghong highlighted several near-term opportunities for further advancing the internationalisation of the renminbi, including:

  1. Positive growth of the Chinese economy, enabling it to continue to serve as the “engine” of global economic growth. “The Novel Coronavirus pandemic is still spreading globally, and a number of countries are seeing negative economic growth, with growth falling even more than during the 2008 Great Financial Crisis. China’s scientific disease prevention has effectively arrested the shock of the pandemic, and in the second quarter of 2020 the economy saw a V-shaped rebound, with GDP growth of 3.2%. The IMF and other international organisations forecast that China is the only major country that will be able to achieve positive growth in 2020…China has again used its own resilience and potential to provide an engine and driver for the world economy, and this has not only strengthened the international community’s confidence in the future, it has also strengthened the confidence of the international community in China and the renminbi. Internationalisation of the renminbi has even surer foundations.”
  2. The “radical market-rescue policies” of the United States will damage the credibility of the US dollar in the long-term, providing an opportunity for the renminbi to establish network effects. “The US has implemented unlimited quantitative easing and other extreme market rescue policies during the Novel Coronavirus pandemic, which already exceed policies for the 2008 Great Financial Crisis, and have led to negative interest rates for US treasury bonds, damaging the interests of international investors. Following the shock of the pandemic, if the Federal Reserve is able to withdraw liquidity and control leverage ratios, the standing of the US dollar as an international currency will be impacted. Compared with the world’s major economies, the Chinese economy’s fundamentals are healthier, it has more fiscal and monetary space, its forex reserves are ample, and its ability to control risk is stronger. It is hoped that renminbi internationalisation will obtain the approval of even more markets.”
  3. Returns and appeal of renminbi assets continue to rise. According to Tu the Chinese economy’s comparative high growth rate is supporting higher investment returns, continually attracting international capital to China, while major international financial indices are all incorporating Chinese A shares.

Tu said that renminbi internationalisation remains a “very long process,” and recommends that China continue to actively drives usage by focusing on the following areas

  1. Raising the renminbi’s share of trade and investment, and expanding renminbi cross-border payments and settlement.
  2. Further driving opening of China’s financial markets and establishing Shanghai as a global financial centre. Increasing the convenience for offshore investors to use the renminbi to invest in domestic stocks and bonds.
  3. Expanding the use of the renminbi in nearby countries and Belt and Road nations, given that the renminbi has already become an anchor currency for many of these regions.

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