Currency Internationalization and Macro Financial Risk Control

International Monetary Institute

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN:
  9789811306976
• eBook ISBN:
  9789811306983
• Topic: Negocios y empresa
• Subtopic: Gestión de riesgos financieros

This book collects expert opinions, research, and risk assessments from within the Chinese financial policy establishment on prospects for the internationalization of the renminbi as a reserve currency around the world. As China's economy diversifies in the acquisition of global assets, the renminbi may partially displace the dollar or yen as a reserve currency, with unpredictable and profound potential consequences. This book, presenting for the first time in English, the Chinese perspective on the internationalization of the Chinese currency will be of great value to central bankers, financiers, and students of international finance.

© The Author(s) 2018

International Monetary Institute (ed.)Currency Internationalization and Macro Financial Risk Controlhttps://doi.org/10.1007/978-981-13-0698-3_1

Begin Abstract

1. Internationalization Index of Renminbi

International Monetary Institute¹

(1)

Renmin University of China, Beijing, China

International Monetary Institute

Email: [email protected]

End Abstract

In 2015, with global economic recovery tortuous and financial market dynamic, Chinese economy moved into a new normal. In spite of current domestic and international economic stress from an increasingly stronger dollar, renminbi (RMB) depreciation, and capital outflow, the internationalization of renminbi is still gaining momentum. Great achievements were made. Cross-border RMB policies under capital account were enforced, the first phase of Cross-border Interbank Payment System (CIPS) launched, and “the Belt and Road” initiative carried out. Especially in November RMB was approved to be included into the special drawing rights (SDR) basket, a milestone of the internationalization of RMB. In the past five years, due to the wider use of RMB in international trade, financial transaction, and international reserves, RMB’s internationalization has been moving on smoothly, with international index of RMB (RII) growing by more than ten times.

1.1 Analysis on RII and Its Variation

1.1.1 Status Quo of RMB’s Internationalization Index

In 2015, the growth of global economy remained sluggish, and the Fed’s announcement of raising interest rate together with a stronger dollar disturbed the world financial market. At the same time, China’s economic development has now entered a new normal, with tough tasks of sustaining economic growth and restructuring. After the “8.11” exchange rate reform, the stress of RMB depreciation increases and daily trading band widened, bringing negative impact on RMB internationalization. However, short-term fluctuation does not conceal its long-term prospect. RMB’s internationalization went smoothly on the whole and made some breakthroughs. Cross-border RMB strategy was improved, the first phase of Cross-border Interbank Payments System launched, and “the Belt and Road” initiative carried out. Especially in November RMB was approved by the board of the International Monetary Fund (IMF) to be the fifth currency in the SDR basket after dollar, euro, yen, and GBP, opening a new chapter for the internationalization of RMB. In 2015, the use of RMB as international currency broadened in payment and settlement, financial transaction, and international reserves, driving the RII higher. As Fig. 1.1 shows, by the end of the third quarter of 2015, RII reached 3.87, a year-on-year growth of 83.9%; by the end of the fourth quarter it reached 3.60, a year-on-year growth of 42.9%. A minor setback of growth rate did not reverse the upward trend. In the past five years, RII grew by more than ten times.

Fig. 1.1

The RII. Note: RII has been subject to the following adjustments. (1) Offshore market has developed rapidly, and the statistics system about renminbi assets improved. Our indicators of RMB international credit include not only the former statistics about the mainland and Hong Kong, but also statistics about Macau, Taiwan, Singapore, and London. (2) Chinese International Balance of Payments Statistics shifted to BPM6 standard in 2015; as a result, the caliber about direct investment included in RII shifted from BPM5 standard to BPM6 standard. (3) RII is modified along with the statistical adjustment of the raw statistics

In 2015, the RIIs in four quarters were 2.48, 2.76, 3.87, and 3.60, respectively. RMB’s internationalization entered a stable yet expanding stage, which, along with the increasing stress in the second half year, resulted in a drop in RII growth, with average growth per quarter falling to 37.8% (as is shown in Fig. 1.2).

Fig. 1.2

RII quarter annual growth

1.1.2 Major Impetuses for RMB’s Internationalization

With global economic recovery tortuous and financial market dynamic, domestic economy is confronted with downward pressure. Faced with complicated and tough economic environment both at home and abroad, the growth rate of RII edged down, but remained promising on the whole. In 2015, the RII was driven to a higher level mainly by the following five factors:

• Firstly, Chinese economy remained stable on the whole and financial reform was advanced smoothly. In 2015, although faced with downward pressure, China remained one of the most stable economies, which laid a solid development foundation for RMB’s internationalization. As a flagship of emerging markets, China boasted a GDP growth rate of 6.9%, one of the fastest in the world; China reinforced structural reforms, kept its monetary policies robust, and its economic and financial system remained resilient against risks, all of which provided RMB’s internationalization with sustaining momentum; the current account realized a surplus of $293.2 billion with a year-on-year growth rate of 33.5%, overseas direct investment (ODI) increased by 14.7% year-on-year, the international payments account stayed balanced basically, and cross-border capital outflow converged to the fundamentals. As for the financial reforms, China seized the opportunity to lift the ceiling of floating interest rate of commercial bank and rural cooperative financial institutions and canceled the interest rate control; improved the regime of central parity rate of RMB; increased the liberalization level of exchange rate; and narrowed the difference between central parity rate and market exchange rate and between onshore and offshore exchange rate. Meanwhile, the publishing of China Foreign Exchange Trade System (CFETS), the improvement of People’s Bank of China (PBOC) exchange rate market management, and the maneuver against the short-selling of RMB abroad helped the market expectations to return to a rational level. By encouraging innovation and following successful patterns nationwide, the RMB convertibility under the capital account was advanced smoothly. The RMB’s admission to the SDR basket represented the acknowledgment to China’s monetary financial reform by the international community.
• Secondly, the policies of RMB cross-border business under capital account improved. Although the volatility of financial market both at home and abroad was heightened and the stress of capital outflow increased, China still made outstanding progress on the policies of the RMB cross-border under capital account, which broadened the backflow channels of RMB, optimized the capital allocation, and supported the real economy. In 2015, China relaxed external debt regulations of enterprises and the two-way cross-border RMB cash pooling, which improved the independence and convenience of cross-border financing; China permitted foreign currency authorities, official reserve managers, global financial organizations, and sovereign wealth funds to enter China’s interbank market and conduct foreign exchange business including spot, forward, swap and options transactions, which improved the representative of RMB exchange rate and enhanced the function of international reserve; the trial of Qualified Domestic Investment Enterprise established in Qianhai Zone of Shenzhen, Shanghai-Hong Kong Stock Connect run smoothly, and the allocation of asset became more diversified. At the same time, China (Shanghai) free trade zone played a leading and exploratory role in capital account convertibility, inspired innovation in the trials, and applied successful patterns to the rest of the country, which accelerated the achievement of capital account convertibility.
• Thirdly, infrastructure construction of RMB improved, and the relative supporting system started to be subject to the international standards. In 2015, China was integrated into the global financial system and management framework. Besides, the infrastructure and relative supporting system for finance improved, providing comprehensive hardware and software support for the use of RMB on an international scale. In October 2015, it was great progress for the modern RMB payment to launch the first phase of CIPS as the strategic financial infrastructure, offering clearing and settlement service on RMB business to the financial institutions both at home and abroad, which covered the major financial centers except the United States. Meanwhile, China got closer to the international standards in statistical management: it adopted the Special Data Dissemination Standards of the IMF, joined the CPIS of the IMF, the International Bank Statistics (IBS) of Bank for International Settlements, and the survey of composition of foreign exchange reserves; converted to The sixth edition of the Balance of Payments and International Investment Position Manual (BPM6); improved the statistical approach, the regime of declaration and examination; and enforced the standardization and publication. In addition, the index system on financial market became abundant: CFETS, BOC Credits Investing & Financing Environment Difference Index and the BOC RMB bond trading index, UBS international bank demand index, and DBS RMB diving index (DRIVE) were published, providing global investors with better reference of RMB investment and use.
• Fourthly, with the development of “the Belt and Road”, China-EU economic and financial cooperation was on the rise. From the beginning of “the Belt and Road”, China signed agreements and MOUs with 31 countries and regions, many construction projects were implemented, and the deepening of the regional economic communication and the establishment of the Asian Infrastructure Investment Bank provided a foundation for the use of RMB along the “Belt and Road”. In 2015, Sino-Australia FTA and Sino-Korea FTA were implemented. China signed international cooperation agreement on production capacity with more than ten countries, and signed currency swap deals with the currency authorities of Suriname, Armenia, South Africa, Chile, and Tajikistan separately. The domestic free trade area and financial experimental zone were constructed at high speed, which helped to further consolidate the RMB function of payment, settlement, investment, and financing. In addition, on the 40th anniversary of establishment of diplomatic ties between China and EU, their financial cooperation continued its positive momentum: European Union became the largest trade partner, the most important source of imported technology, and a great investment cooperation partner for China; the business cooperation scale between China and EU in 2015 reached $169.2 billion; the top leaders of both sides made frequent visits to each other, which helped to enhance the dialogues on economy and finance, supported the development of offshore RMB market, and deepened the cooperation on market access, cross-border securities regulation, investment platform, and supporting facilities. At the same time, RMB opened the gate of Sino-Central and Eastern European Countries (CEEC) cooperation: the fourth China-CEEC Leaders Meeting was held in November; the participants advocated the establishment of 16+1 Financial Company, discussed the possibility of building up the China-CEEC cooperation fund, and agreed to support the setup of RMB clearing regime, offering good external environment for the CEEC offshore RMB market.
• Fifthly, under the circumstances of the fluctuating financial market and a stronger dollar, the use of RMB in denominating commodities became more frequent. With the international oil price low and petrodollar tightened, the level of RMB use in Middle East increased. In 2015, RMB clearing center in Qatar was set up, and MOU was signed between China and UAE, making RMB the common currency used in the payment from UAE and Qatar to Chinese Mainland and Hong Kong, with proportions of 74% and 60%, respectively, an annual growth rate of 52% and 247%. Serbia started its RMB projects. The Russian acceptance of RMB constantly improved, making RMB its third popular currency after USD and euro, and the Moscow bourse launched ruble-denominated RMB futures trading. London Metal Exchange accepted RMB as a pledge currency. China (Shanghai) free trade area started cross-border RMB spot commodity transaction in July. The use of RMB in commodity denomination was enhanced.

1.1.3 Major Challenges for RMB’s Internationalization

In 2015, the growth of RII slowed down. Offshore RMB deposits and issuance of RMB-denominated financial products were lackluster. In the short term, RMB’s internationalization was facing some stress coming from the following three aspects:

• Firstly, the temporary depreciation of RMB had negative effects on the confidence of RMB holders and users. With the United States tightening its monetary policies and the implementation of “8.11” exchange rate reform, RMB was confronted with temporary depreciation pressure instead of the former trend of unilateral appreciation, and the exchange rate against the dollar fell by 4.5% through the year. The outflow of capital and the shorting on RMB abroad increased the exchange rate fluctuation, bringing the shocks to RMB’s internationalization and capital account opening. Chinese citizens adjusted their assets and liabilities arrangements, and repaid the debt ahead of schedule, while non-residents cut their holdings of domestic RMB assets. Both offshore RMB deposits and the issuance of RMB bonds shrunk. In 2015, offshore RMB deposits in Hong Kong fell to 851.11 billion yuan, with a drop of 15.2% year-on-year; the issuance of dim sum bonds in Hong Kong fell to 126.51 billion yuan, with a drop of 42.8% year-on-year. The severe fluctuation of exchange rate brought negative impacts on RMB’s function in payment, settlement, investment, and financing. The negative interest rate spread between abroad and the domestic market restrained the use of RMB. Foreign exchange rate market, financial products system, the market participants’ awareness of risk management, and the ability and policy portfolio of monetary authority financial management still needed to be improved.
• Secondly, the downward risk of China’s economy increased and the China bears were growing louder. In 2015, China’s structural reform advanced zigzag through hardship, the pressure of cutting overcapacity, reducing inventory, and de-l...

Table of contents

• Cover
• Front Matter
• 1. Internationalization Index of Renminbi
• 2. Status Quo of Renminbi Internationalization
• 3. Event of the Year: The RMB’s Inclusion into the SDR Basket
• 4. Macro-Financial Risks of RMB Internationalization
• 5. RMB Exchange Rate: Regimes and Policy Issues
• 6. The Price Linkage and Risk Conduction of RMB Underlying Asset
• 7. Bank Internationalization and Risk Prevention
• 8. Supply-Side Structural Reforms Consolidate the Economic Foundation of RMB’s Internationalization
• 9. The Prevention of Systematic Risks and the Framework for Macro-Prudential Policies
• 10. Conclusions and Proposals
• Back Matter