author:
Li Jianjun (Analyst, Institute of International Finance, Bank of China)
Feng Zhen (School of Statistics, Chinese Min University)
Cui Xiqiang (Chinese Min min bank Jinan Branch)
Abstract: After the outbreak of the global financial crisis, the international monetary system based on the US dollar standard has exposed great flaws. Countries and international organizations around the world have put forward the idea of reforming the international monetary system. With the continuous improvement of the comprehensive strength of the mainland economy, the recognition and acceptance of the RMB in the international market have been continuously enhanced, and remarkable achievements have been made in trade settlement and offshore market development. At the same time, we also need to face up to the fact that the current degree of internationalization of the renminbi is still limited, and there is still a big gap with major international currencies. Looking ahead, if the RENMINBI initiates all-round internationalization, it will become a major international currency in about 15 years.
Keywords: RMB internationalization, development status, degree measurement, outlook assessment
First, the logical framework and development status of RMB internationalization
In July 2009, after the promulgation of the Detailed Rules for the Implementation of RMB Cross-border Trade Settlement, the logical framework for the international development of RMB has gradually become clear. In short, the logical framework for the internationalization of the RENMINBI is two domestic and overseas markets, two major cycles and six parts (Figure 1). The first cycle is a cross-border cycle, which can be divided into current account, capital account, interbank cooperation and intergovernmental cooperation; the second cycle is an offshore cycle, mainly consisting of the construction of an offshore centre in Hong Kong and the overseas RMB market.
Figure 1 Logical framework of RMB internationalization
From the perspective of cross-border circulation, since the pace of RMB cross-border trade settlement began in 2009, the scale reached 500 billion yuan in 2010, exceeded 2 trillion yuan in 2011, and approached 3 trillion yuan in 2012, accounting for 8.4% of the mainland's total foreign trade in the same period. By the first quarter of 2013, the cumulative amount of RMB FDI and OUTWARD direct investment reached RMB330.9 billion and RMB38.4 billion. Since 2008, Chinese Bank has signed currency swap agreements with the monetary authorities of nearly 20 countries, including the Bank of Korea, the Reserve Bank of Australia, and the Central Bank of the Russian Federation, with a total amount of about 2 trillion yuan.
From the perspective of overseas circulation, the offshore RMB market continues to grow, with the balance of RMB deposits in Hong Kong exceeding RMB600 billion at the end of 2012, accounting for more than 8% of the deposit balance of local financial institutions; the Bank of China and the Industrial and Commercial Bank of China respectively undertake the functions of RMB clearing banks in Taiwan and Singapore; London, Paris, Luxembourg, Sydney, etc. are also actively striving for the development of the RMB offshore market.
With the continuous enhancement of China's economic strength, the increase in the degree of opening up to the outside world, and the acceleration of the pace of financial reform, the acceptance of the renminbi in the international market will further increase. In the cross-border RMB market, the current account business will enter a period of steady development, and the growth potential of the capital account business is huge. It is estimated that the cross-border RMB settlement volume in 2013 will exceed 4 trillion yuan, of which the settlement amount of trade in goods is about 2.5 trillion yuan, other current accounts are expected to reach 1.1 trillion yuan, foreign direct investment is 350 billion yuan, and outward direct investment is 50 billion yuan.
In the field of offshore RMB market, Hong Kong's position as an offshore RMB center will be further consolidated, and Taiwan, Singapore, London, Luxembourg and other countries will also actively carry out offshore RMB market business. The overseas RMB stock continues to expand, and the total amount of offshore deposits is expected to exceed 1 trillion yuan by the end of 2013. Renminbi bond products are becoming more diversified, the secondary market is becoming more and more active, and the renminbi stock market, foreign exchange market, and renminbi insurance and wealth management products will continue to be enriched and expanded.
2. Calculation of the degree of internationalization of the renminbi
The functions of international currencies mainly include denominated settlement, investment transactions and reserve currencies. Generally speaking, international trade has a huge impact on the process of currency internationalization, and the function of international money begins with cross-border currency settlement in international trade. With the continuous expansion of cross-border settlement scale, the world's recognition of the currency is getting higher and higher, the currency is becoming more and more active in the financial market, and the function of the currency has gradually expanded to the financial market and eventually become an international reserve currency. In view of this, we will measure the current degree of internationalization of the RENMINBI from three aspects: trade settlement, financial market transactions and foreign exchange reserves.
1． A measure of the degree of internationalization of the RENMINBI in cross-border trade settlement
The data shows that from October 2010 to January 2013, offshore RMB payments increased by 29.75 times. Among the world's major payment currencies, the renminbi has also jumped from 35th in October 2010 to 13th, which can be described as a rapid growth. In addition, the international acceptance of the RENMINBI has also increased significantly during this period, with the number of countries and regions processing RMB payment business increasing from 65 to 91 and the number of institutions increasing from 617 to 983 from June 2011 to June 2012. The number of RMB customer relationships among the top five RMB payment banks increased from 91 to 153 (Figure 2).
Figure 2 International acceptance of the renminbi
Although RMB cross-border trade settlement has achieved good results since its inception, in absolute terms, the degree of RMB cross-border trade settlement is still insufficient.
Table 1 shows the use of cross-border trade settlement in the world's major currencies in 2011 and 2012, and it can be seen from the data in the table that the euro, us dollar, british pound, yen, Australian dollar, Canadian dollar and Swiss franc are the most used international currencies in cross-border trade settlement. Among them, the euro and the US dollar are the most important currencies for cross-border trade, accounting for about 70% of cross-border trade settlement. The proportion of cross-border trade settlement use of the renminbi is relatively low, only about 0.6%, which is a huge gap with the world's major currencies. Compared to the rest of the BRICS, the renminbi is second only to the Russian ruble, better than the South African rand and the Indian rupee, which is not on the list, as well as the Brazilian real.
Table 1 The proportion of currencies used in cross-border trade settlement
Of course, Table 1 does not take into account the international trade situation of each country, but only the proportion of cross-border trade settlement. Since the driving force of cross-border trade settlement comes from international trade, considering cross-border trade settlement on the basis of international trade volume can better reveal the international acceptance of a country's currency, and then reflect the degree of internationalization of the currency. Table 2 constructs a new indicator based on the proportion of international trade of each country: - the proportion of national currencies in cross-border trade settlement / the proportion of the country's trade volume in the world's total trade volume. This new indicator provides a more precise measure of how internationalized currencies are.
Table 2 The proportion of currencies used in cross-border trade settlements/ Trade by country accounts for the total world trade1
As can be seen from the data in Table 2, the degree of internationalization of currencies has changed considerably, taking into account the trade situation of various countries. The us dollar ranked first in the index by more than 400%, reflecting the well-deserved status of the US dollar as the world's core currency, and the british pound also ranked second with more than 200%, indicating that the pound is still strong in trade settlements, and the euro has fallen to third place. Compared with the world's five major currencies and the currencies of the BRICS countries, the proportion of CROSS-border trade settlement of RMB is still the lowest, and both the South African rand and the Russian Ruble are far more than the RMB, which shows that the RMB is less used in cross-border trade settlement.
2． A measure of the degree of internationalization of the renminbi in financial market transactions
The data shows (Table 3), in 1998, the proportion of the US dollar in the foreign exchange market transaction was 86.8%, and in 2001 reached a peak of 89.9%, although it has gradually decreased since then, but still accounts for about 85% of the share, ranking first in the world, indicating the unshakable international status of the US dollar. After the birth of the euro, it inherited the share of the Deutsche Mark and the French franc, accounting for between 37% and 39%. The Yen and the Pound currently account for 19% and 12.9% respectively. The renminbi has undergone a process from scratch in foreign exchange transactions, currently accounting for 0.9% of foreign exchange market transactions, but the gap with the world's major currencies is obvious.
Table 3 Major currencies trading in the foreign exchange market
The data in Table 3 basically reflect the international status of a country's currency, but because the size of a country's economy is not taken into account, it does not accurately reflect the degree of internationalization of the currency. By combining the proportion of the parent economy in the world economy and the proportion of different currencies in the international foreign exchange market, we have calculated a new set of data that better reflects the degree of internationalization of a country's currency. Table 4 shows data on major currencies for 2007. We can see that the swiss franc foreign exchange transaction share / GDP up to 436%, fully demonstrating that the Swiss franc has a high degree of internationalization after excluding the impact of economic size. The proportion of the four international currencies of the US dollar, the British pound, the yen and the euro is 169.50%, 147.6%, 109.4% and 83.3% respectively, which is also consistent with the international status of these four currencies.
Among the BRICS countries, with the exception of South Africa, which has a higher proportion of 87.7%, the other four countries are relatively low. It shows that the currencies of the BRICS countries are relatively low in internationalization relative to their huge economic scale. It is particularly noteworthy that the proportion of RMB foreign exchange transactions/GDP is only 3.7%, which is not only a huge gap with the five major currencies, but also ranks the lowest among the BRICS countries, indicating that the proportion of RMB used in the financial market is still low.
Table 4 Major currencies' share of foreign exchange transactions/parent GDP in 2007
Table 5 recalculates the indicator with data from 2010. Compared with the 2007 data, the ranking of each currency is basically the same as in 2007, the Swiss franc and the Hong Kong dollar still occupy the top two, but the proportion of the Swiss franc has dropped sharply, and the proportion of the four major currencies of the US dollar, the british pound, the japanese yen and the euro has risen to varying degrees, indicating that its degree of internationalization is still improving. Among the BRICS countries, except for the South African rand, the degree of internationalization of the other four currencies has increased, of which the proportion of the renminbi is 4.8%, an increase of 1.1 percentage points, but the degree of internationalization of the renminbi is still the lowest. This shows that from the overall point of view, the degree of internationalization of the RENMINBI is not only on par with the currencies of developed countries, but also has a huge gap even compared with other BRICS countries.
Table 5 Proportion of foreign exchange transactions in major countries and regions in 2010 / proportion of maternal GDP
As can be seen from Table 6, the US dollar and the euro are the world's most important reserve currencies, accounting for nearly 90% of the world's reserve currency, followed by the british pound, yen and Swiss franc, which rank second, third and fourth respectively, which together constitute the world's five largest reserve currencies, except for 2007, the proportion of the five major currencies in the world's reserve currency is close to or even more than 95%.
So far, there is still no data on the renminbi as the world's reserve currency, but there are reports that the Central Bank of Nigeria has used the renminbi as a reserve currency, accounting for 5% to 10% of its $33 billion in foreign exchange reserves. Japanese Finance Minister Jun Azumi also revealed on March 13, 2012, that the Chinese government had agreed on March 8 to the Japanese government to buy up to 65 billion yuan (equivalent to $10.3 billion) of Chinese government bonds, and that Japan would implement the purchase plan in batches. In addition, the Bank of Korea began buying Chinese bonds in the Chinese interbank market in April 2012 with a previous transaction quota of 20 billion yuan (US$3.2 billion) and began buying Chinese stocks in July 2012 with the US$300 million QFII quota it obtained. According to the latest news, RBA Deputy Governor Philip Lowe said on 23 April 2013 that the RBA would invest up to 5% of its foreign exchange reserves in Chinese government bonds, which has been approved by the Bank of China. According to the Wall Street Journal, Australia's current foreign exchange reserves are about 38.2 billion Australian dollars, and 5% of foreign exchange reserves are about 1.91 billion Australian dollars, or about 12.4 billion yuan (about 2 billion US dollars). Even if these reports are all true, the total amount is only $19 billion, which is still insignificant compared to the world's total reserves of more than $5.6 trillion.
In summary, although since the start of the RMB internationalization process in 2008, the internationalization of the RMB has achieved a lot of results, but from the perspective of foreign exchange transactions, cross-border trade settlement, foreign exchange reserves, the degree of internationalization of the RMB is still low, not only with the world's major currencies the gap is obvious, but also lag behind other BRICS currencies, the future still needs us to continue to promote the internationalization process of the RMB from many aspects.
3. Assessment of the outlook for the internationalization of the renminbi
From the current point of view, China has begun to try to promote the opening up of the capital account and the internationalization of the renminbi in a step-by-step manner, and has now opened up foreign direct investment in the renminbi, and allowed foreign capital to invest in the mainland capital market in the renminbi situation, while encouraging domestic and foreign-funded enterprises to invest in each other in the form of renminbi, allowing foreign enterprises to list and issue bonds in the form of renminbi in China, and the renminbi, the yen, and the Australian dollar can be directly converted. The roadmap for the renminbi to full convertibility is becoming clearer and the timetable is predictable, thus paving the way for the further internationalization of the renminbi.
In order to clearly present the future path of RMB internationalization, the future development prospects of RMB internationalization are simulated under the condition of assuming that RMB is fully convertible, and according to the future development trend of China's economy and the current development of the world economy. From the quantitative point of view, the basic model of Chinn and Frankel (2005) is used to establish a mixed data model of panel data using the historical data of major international currencies, and the changes of international reserves are explained by relevant variables:
Based on the above model, we make a medium-term forecast of the rmb international reserves and try to extrapolate. First of all, the initial value of the independent variable is selected, of which the GDP proportion is based on the IMF forecast, the exchange rate change is extrapolated by the 5-year moving average, and the initial value of the RMB international reserve is extrapolated on the basis of the known RMB international clearing volume, and the relationship between the US dollar reserve and the transaction settlement is used to calculate, on the basis of which the international reserve forecast and extrapolation value of the RMB are obtained under the general conditions of international currencies. Judging from the forecast results, if the RMB starts all-round internationalization, the proportion of international reserves will reach about 3% within 5 years, and the proportion of international reserves will reach more than 10% in 2030, becoming the third largest international currency.
Here, we also emphasize that the forecast is a calculation based on the current experience of major international currencies under the assumption that the capital account is fully convertible and the renminbi is fully open, etc., and aims to indicate what the future vision of the policy layer is if it comprehensively promotes internationalization.
Table 7 Forecast of the proportion of rmb and major international currency reserves Unit: %
On this basis, we can extrapolate the use of rmb in international settlement. Taking the US dollar as an example, in the past 10 years, the proportion of international liquidation and international reserves of the US dollar has maintained a very stable proportional relationship, and from 2001 to 2010, the proportion basically fluctuated in the range of 1.45-1.59, with an average ratio of 1.52. Assuming that the proportion of RMB clearing and reserves is the same, it can be deduced that the international clearing volume of RMB will reach the level of US$2.5 trillion in 2016.
There are many influencing factors and complex forecasts for international bonds, so we use the trend extrapolation method to make conservative estimates and speculate on the prospects of RMB bonds on the basis of the existing data released by BIS. From Figure 3, since 2005, the issuance of RMB international bonds has a relatively stable linear growth trend, according to which it can be predicted that the annual issuance of RMB international bonds within 5 years will be conservatively estimated to reach a scale of 500 billion yuan.
Figure 3 Changes in the amount of RMB international bond issuance
From a more intuitive quantitative perspective, although there is no clear boundary, the internationalization of the renminbi will be promoted in a focused echelon in the order of current account trade settlement, capital account investment transactions, and the inclusion of sovereign economies in international reserves, as shown in Figure 4. The renminbi first acts as a denominated settlement currency in international trade, and will develop rapidly in the next 5 years, establishing a real economic basis for the global use of the renminbi and providing sufficient overseas capital pools. With the expansion of RMB international trade settlement, the investment and financing of the financial market will gradually grow, RMB denominated products will continue to enrich and complex, RMB investment transactions will begin to take off, and accelerate growth in the next 10 years or so, and then maintain a proportion compatible with trade, stable development. When the application of rmb in international trade and financial markets is expanding, third-party countries and regions will substantively incorporate RMB into their international reserves to cope with the problem of RMB balance of payments in the balance of payments, and the proportion of RMB in international reserves will gradually grow and stabilize.
Figure 4 Roadmap for RMB internationalization
The above analysis and forecasts depict for us the current situation and broad prospects of the internationalization of the renminbi. On the one hand, we can see the rapid development of the channel and quantity of international use of RMB since the settlement of cross-border trade, on the other hand, we also see that the current breadth and depth of international use of RMB are still very limited and need to be further promoted. From the perspective of forecasting and speculation, the future international use of RMB will be a very considerable amount, and there will be trillions of RMB as international reserves, trade settlement, valuation and other functions.
The internationalization of the renminbi is not only the embodiment of the actual needs of overseas, especially the surrounding areas, under the development of the international monetary system and the international financial crisis, but also the specific requirements for the further deepening of the mainland's reform and opening up. The internationalization of the RENMINBI requires not only the development of overseas demand and markets, but also the guarantee of domestic institutional reform and the deepening of financial markets. This internationalization process not only requires the continuous promotion of the scope and depth of RMB use and projects, but also the deepening of the market and the escort of the market system. We look forward to the steady progress of this process, as well as the risks and side effects that need to be estimated and prepared.
Experts and scholars at home and abroad generally believe that from the perspective of development trends, China's economic scale is expected to reach the first in the world around 2030, when on the basis of scientific and technological progress, geopolitical stability, and cultural exchanges and harmony, the RENMINBI will widely enter the balance sheet of foreign non-residents, including enterprises and households, and become the third largest international currency with the same function as the US dollar and the euro.
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