US Fed Creates Opportunities for Renminbi Internationalisation: Zhang Liqing


Leading economists within China are stepping up calls for the country to further drive the internationalisation of the renminbi in order to deal with the potential fallout of financial sanctions applied by the US, as well as the instability caused by the Federal Reserve’s aggressive monetary policy measures.

US sanction measures crimp financial opening

Zhang Liqing (张礼卿), executive director of the China Society for Finance and Banking (中国金融学会) and director of the International Finance Research Center of the Central University of Finance and Economics, recently highlighted the adverse impact of US sanctions upon the recovery of the world economy and the opening up of the global financial sector.

“The financial sanctions imposed by the United States and Europe on Russia after the Russia-Ukraine conflict appear to indicates that financial opening of any country may face certain new challenges,” Zhang said in a speech delivered at the 2023 China Society for Finance and Banking Academic Annual Meeting and China Finance Forum Annual Meeting held on 4 April.

“Factors such as the conflict between Russia and Ukraine, the energy crisis, repeated COVID-19 outbreaks, aggressive interest rate hikes by the Federal Reserve, and increased debt risks in developing countries will all have a negative impact on economic recovery.

“Consequently, how we can continue to promote financial opening while stabilizing risks will be a very important topic which warrants our in-depth study.”

Zhang called for driving the further internationalisation of the renminbi as a “countermeasure” against both US sanctions and global instability caused by the Fed’s monetary policy decisions.

Fed’s monetary policy abets renminbi internationalisation

Zhang pointed in particular to the negative impact of the Fed’s aggressively hawkish monetary policy on heavily indebted developing nations as creating opportunities for advancing renminbi internationalisation.

“At present, due to the Fed’s aggressive interest rate hikes, the debt risks of certain developing countries have risen sharply and they are facing greater liquidity difficulties,” Zhang said.

“We can’t rule out the possibility that some countries will fall into a debt crisis. Since the amount of liquidity that the IMF can provide is comparatively insufficient, and the scale of other forms of international liquidity support is also very limited, RMB liquidity arrangements can fulfil a supplementary role to a certain extent. Personally, I think we can do more in this regard.

“This is not only a favourable opportunity for the internationalization of the RMB, but also an important way for China to contribute to world economic and financial stability.”

Measures for driving renminbi internationalisation

While China has recently struck a number of bilateral currency agreements with major economies including Brazil and Saudi Arabia, Zhang points out that these arrangements still have only limited significance for internationalisation of the renminbi.

According to Zhang, true internationalisation of the renminbi entails other countries making use of China’s official currency for trade amongst themselves.

“Recently, China has reached an agreement with certain developing countries to use local currency for settlement in bilateral trade,” Zhang said. “This will naturally play a certain role in promoting the internationalization of renminbi.

“However, it must be clearly realized that it will be difficult to achieve extensive and deeper internationalization of renminbi based on bilateral trade.

“Only when other countries also intend to use the renminbi for settlement when conducting trade with each other – that is, it becomes a widely used third party currency for trade amongst other countries, can the internationalization of renminbi truly reach a new level.”

Zhang outlined a series of requirements and measures for further driving the internationalisation of the renminbi as widely adopted currency for global settlement and trade.

  1. Surpassing the US economy in size by ensuring stable growth. Zhang considers sustained growth of the Chinese economy to be the most important factor for driving internationsliation of the renminbi. “China’s economy is now two-thirds the size of that of the United States. If we can reverse this, and the US economy is two-thirds the size of of China’s economy, then the space for the internationalization of the RMB will be opened up.”
  2. Promoting market-oriented economic and financial reforms. “[We must] strive to improve laws and regulations compatible with the market economy, and continuously improve the investment and business environment.”
  3. Steadily expanding capital account opening. “Without the further opening of the capital account, it will be difficult for the internationalization of the renminbi to proceed. Of course, while expanding opening up, it is also necessary to strengthen and improve macro-prudential supervision.”
  4. Promoting reform of the RMB exchange rate system and continue to enhance the marketization of the RMB exchange rate.
  5. Actively participating in the reform of global financial governance and striving to enhance China’s voice in international monetary and financial affairs.