A senior official from the People’s Bank of China (PBOC) says that the COVID-19 pandemic in tandem with ongoing efforts by Beijing to open up the Chinese financial sector have served as critical drivers for the internationalisation of the renminbi and foreign investment into domestic financial assets.
In an article published by PBOC, Zhou Chengjun (周诚君) writes that while internationalisation of the renminbi initially involved its use for trade and settlement with countries adjacent to China, the focus has since shifted towards attracting inbound foreign investment.
An increasing number of investors from abroad have set their eyes upon China’s renminbi-denominated assets in the wake of the COVID-19 pandemic, given the stronger returns they offer compared to other nations still grappling with the disease.
“Especially since the onset of the Novel Coronavirus pandemic and international financial market turmoil, it is very difficult for international investors to find comparatively secure assets that provide higher returns,” writes Zhou.
“At such time the renminbi increasingly embodies the features of a secure asset…from January to August 2020 overseas investors increased their holdings of renminbi assets by over 1 trillion yuan, and in July alone the increase exceeded 560 billion yuan.”
Zhou points out that renminbi financial assets have proven to be “highly alluring” during the global COVID-19 pandemic, with 10-year Chinese government bonds providing returns of as high as 3.3%, as compared to around 0.91% for US treasures of the same tenor, -0.6% for 10-year German sovereign bonds and -0.3% for French sovereign bonds.
In addition to the COVID-19 pandemic heightening the lustre of renminbi assets as the Chinese economy recuperates in advance, Zhou also pointed to the critical role played by efforts to open up Chinese financial markets since the middle of last decade.
“In order to make the renminbi an international reserve currency, it is first necessary to open up financial markets, and allow overseas central banks and and sovereign wealth investors to enter the Chinese market and purchase renminbi-denominated financial assets,” writes Zhou.
“If we just open the market there will be a large volume of overseas investors willing to enter, purchase and hold renminbi-denominated financial assets, and share in the benefits of the high returns of renminbi assets, as well as the dividends of the Chinese economy’s rapid growth.
“While the internationalisation of the renminbi has only progressed for a brief 11-year period, it has obtained considerable results.
“Over the past several years, internationalisation of the renminbi has already undergone certain changes…around 2016, following the inclusion of the renminbi in SDR, the People’s Bank of China and the State Administration of Foreign Exchange unveiled a series of measures for the opening of domestic financial markets.
“China’s financial markets are increasingly and more broadly opening up externally, allowing qualified foreign investors to purchase financial products including stocks, bonds, funds and wealth management products.
“For this reason, the current stage of renminbi internationalisation is already closely tied to the in-depth opening of China’s financial markets.”
In order to shore up the international status of the renminbi, Zhou called for relying more upon “market-based renminbi exchange rate formation mechanisms and market-based renminbi pricing signals” in future.