It is recommended to continue to enhance the comprehensive national strength and promote the pace of RMB internationalization

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In recent years, under the background of the complex and volatile global economic situation and the increasing pressure on domestic and foreign markets, the economies of China and the United States have diverged, and the dislocation of monetary policies has been obvious. The main manifestation is United States the intensification of inflation, the Federal Reserve opened the interest rate hike window from 2022, sharply increasing the federal funds rate from 0% to 0.25% to 5.25% to 5.5%, and the central parity of the domestic RMB exchange rate fell by 4.6% year-on-year in 2023. At the same time, due to its own reasons such as downward pressure on the economy and low inflation rate, China's central bank has cut interest rates and reserve requirements (RRR) several times to keep domestic interest rates low. According to data from the People's Bank of China, on May 20, 2024, the one-year loan prime rate (LPR) has dropped by 3.45%, and the LPR for more than five years is 3.95%, far below the global average.

Interest rates between China and the United States widened, with the spread between the 10-year Treasury rate widening to around 220 basis points, and the difference between the real lending rates of China and the United States by about 300 to 400 basis points. On the one hand, China's low interest rate environment is conducive to economic recovery. In 2023, the mainland will have a net outflow of US$284.5 billion under the balance of payments capital account (including net errors and omissions), a year-on-year decrease of 18.7%, and a net outflow of US$209.9 billion from the private capital account (i.e., a non-reserve financial account), a year-on-year decrease of 18.4%. As of the end of May 2024, the balance of Chinese bonds held by foreign institutions reached a record high of 4.67 trillion yuan. At the end of 2023, the balance of domestic stocks held by overseas institutions and individuals was 2.79 trillion yuan, a year-on-year decrease of 12.7%.

On the other hand, under the guidance of artificial intelligence United States-based high-tech, the United States economy has a relatively strong economic growth momentum, and the US dollar is not only used as a United States currency, but also as a global reserve currency, commodity denomination currency, cross-border settlement currency, and payment currency. For example, in 2023, United States net inflow of international capital (excluding cross-border direct investment) will be US$864.5 billion, ranking first in the world for many consecutive years, and the purchase of US stocks will be US$160 billion, in stark contrast to the net outflow of US$250.7 billion in the previous year. The internationalization of RMB and the overseas capital face the following problems:

First, the comprehensive national strength needs to be improved urgently. From the perspective of the economy and the stock market, the total GDP and total market value of the stock market in the mainland will account for 17.2% and 9.39% of the world in 2023, respectively, compared with the total GDP of the United States and the total market value of the stock market accounting for 24.2% and 48% of the world respectively in the same period.

Second, the international status of the renminbi is not high. From the perspective of CIPS (RMB Cross-border Payment System), as of the end of 2023, there are 1,484 domestic and foreign institutions directly or indirectly participating, which is far behind the access of tens of thousands of financial institutions in more than 200 countries around the world to the Society for Worldwide Interbank Financial Communication (SWIFT) payment system. In terms of reserve currencies, as of the fourth quarter of 2023, 80 countries around the world held RMB reserves of US$216.7 billion, with RMB accounting for 2.29% of the world's foreign exchange reserve currencies, while the US dollar accounted for 58% of the world's foreign exchange reserves. According to SWIFT data, in December 2023, RMB accounted for about 3% of the global payment currency amount. RMB accounts for 5.07% of cross-border transactions, US dollars 82.84%, and euros 7.35%.

Third, the proportion of gold reserves is relatively low. As of the end of 2023, the mainland's gold reserves were 2,235.41 tons, accounting for 4.3% of foreign exchange reserves, lower than the 16.25% level of major countries in the world, which is not conducive to maintaining the confidence of international investors.

To this end, it is advisable to:

1. Adhere to steady growth and expectations, and continue to promote the improvement of comprehensive national strength. We should put stable growth and stable expectations in a prominent position, adhere to the requirements of a limited government and an effective market, vigorously clean up the non-market factors that restrict the endogenous development of the economy, create a good business environment and innovation environment, and strive to consolidate the good momentum of economic rebound. Strengthen the optimization and innovation integration of administrative, fiscal and financial policies, build a system and mechanism to support scientific and technological innovation and the transformation of scientific and technological achievements at the same time, encourage market players to transform technology into product industry advantages, strive to create new models, new formats and new systems, and strive to enhance the comprehensive national strength of China's economy in the world, so as to provide strong support for the internationalization of the RMB. When conditions are right, we will take the opportunity to increase gold reserves to provide strong support for the internationalization of the RMB.

It attaches great importance to the role of the financial market, especially the role of the capital market in the allocation of resources, vigorously improves the quality of listed companies, and continuously enhances the confidence of domestic and international investors in RMB assets. Strengthen the establishment of the rule of law in the financial sector, implement strict punishments and strict laws, and focus on rectifying illegal and criminal financial activities in key areas such as insider trading, market manipulation, and financial fraud. Strengthen financial risk management and control, strengthen the risk assessment and supervision of domestic capital overseas investment projects, and prevent the occurrence of financial risks. In accordance with the need to be both open and manageable, coordinate development and security, accelerate the improvement of cross-border capital flow monitoring, early warning and response mechanisms, build a high-level regulatory system compatible with financial opening-up, and resolutely adhere to the bottom line of no systemic financial risks.

2. Adhere to the pace of RMB internationalization and promote the enhancement of the international competitiveness of RMB. Encourage domestic financial institutions to innovate financial products and services in response to the needs of financial borrowing to go overseas, and launch financial products suitable for the overseas expansion of domestic capital, such as taking advantage of the current low interest rate environment, on the basis of a comprehensive assessment of risk and safety, in cross-border investment and financing, overseas M&A loans, government loans, international aid and green energy pricing currency, etc., using RMB for settlement, and promoting the internationalization of RMB. At the same time, optimize the financial service process, improve service efficiency, and reduce the financing cost of domestic capital for overseas expansion. We will set up a special government guidance fund and establish a RMB overseas investment guidance mechanism to provide low-cost financing for domestic capital borrowed by the financial sector to go overseas, especially in RMB denominated loans and credit guarantees.

At the same time, it is required that investment projects must involve RMB settlement or promote the circulation and acceptance of RMB in the local area, so as to promote the process of RMB internationalization. Relying on the advantages of Hong Kong, Shanghai and other international financial centers, Hong Kong will give full play to its role as a hub for RMB offshore centers, build an efficient and convenient RMB cross-border payment and clearing system, and simplify the approval process for cross-border financing. Encourage financial institutions in both places to innovate RMB financial products. For example, the issuance of overseas RMB bonds and cross-border RMB loans to serve overseas enterprises and projects, and broaden the financing channels of domestic capital.

3. Adhere to the pace of institutional opening-up and deepen international financial cooperation. Steadily promote the reform and opening up of the foreign exchange sector, take into account the internal and external balance of the exchange rate policy, uphold market-oriented fluctuations to eliminate pressure, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. We will improve the pilot project of integrated capital pooling of domestic and foreign currencies for multinational companies, promote the two-way and high-level opening of the financial market, strengthen the integration of trading rules with international standards, abolish unreasonable regulations, focus on the stability and transparency of rules and investors' sense of gain, build scientific, reasonable and efficient regulations in accordance with the law, accelerate the construction of Shanghai International Financial Center, set up an international board in Shanghai, and promote the facilitation of foreign investors' participation in the domestic bond and securities markets.

Strengthen international financial cooperation, strengthen financial cooperation with countries along the "Belt and Road" and important trading partners, promote the implementation of domestic and foreign currency settlement in cross-border trade and investment through multilateral, bilateral or multilateral currency swap agreements, and expand the application of RMB in international trade settlement, investment and reserves. At the same time, we will jointly promote the internationalization of the RMB. Through business cooperation and information sharing with international financial institutions, we will improve the recognition and use of RMB in the international financial market.

Author: Hu Xiao, member of the Sichuan Provincial Committee of the Chinese People's Political Consultative Conference, director of the Enterprise Committee of the Provincial Committee of the China Democratic National Construction Association, president of the Sichuan Provincial Network Representative Association; Li Enfu is a member of the Sichuan Provincial Committee of the Chinese People's Political Consultative Conference, a member of the Central Financial Committee of the China Democratic National Construction Association, the director of the Finance and Finance Committee of the Provincial Committee of the China Democratic National Construction Association, and a former senior economist of the Sichuan Branch of the People's Bank of China.