May 9, 2023
SHANGHAI – RMB sets records in some markets, brightens its credibility and image elsewhere
On April 10, the Bank of Russia, the country’s central bank, made a stunning announcement. The yuan/rouble pair hogged a record 39 percent share of trading on the Russian currency market in March, it disclosed. The figure in itself may not appear stunning, but when seen in the overall context, the tectonic shift currently underway in currency markets would become apparent.
In grabbing the highest market share, the yuan/rouble pair dethroned the US dollar/rouble pair, whose share fell to 34 percent in March, the lowest in years. A Bloomberg report in early April said the yuan has replaced the greenback as the most traded currency in Russia.
In early April, NBD-Bank, a Russian bank for small and medium-sized enterprises, announced it would join the Cross-border Interbank Payment System, or CIPS, which specializes in cross-border renminbi, or RMB, payment clearing.
At the end of last year, the Russian Federation’s Ministry of Finance announced it would change the structure of its National Wealth Fund, under which RMB assets can take up a maximum weighting of 60 percent, with gold allowed 40 percent. The NWF will no longer invest in assets denominated in the US dollar.
The story in Russia is just a snapshot of the progress the RMB has made in terms of wider presence and usage in international currency markets.
By the end of 2022, the Chinese yuan had surpassed the euro to become Brazil’s second-largest foreign reserve currency, accounting for 5.37 percent of Brazil’s international exchange reserves, Brazil’s central bank announced in March.
Argentina has decided to shift from the dollar to the renminbi for all settlements of imports from China starting from May, said a statement published by China’s embassy in Argentina on April 27.
In February, the People’s Bank of China, the country’s central bank, signed an agreement with Brazil’s central bank for renminbi settlements. This indicates that the two countries can use the local currencies as the intermediary currency in trade.
In mid-March, the Export-Import Bank of China achieved the first RMB loan cooperation with Saudi National Bank, the largest commercial bank in Saudi Arabia.
In late February, the Central Bank of Iraq, or CBI, the country’s central bank, announced a plan to boost the balances of Iraqi banks that have accounts with Chinese banks in yuan. While Iraq is the second-largest oil-producing member of the Organization of Petroleum Exporting Countries, the CBI’s latest move may prompt other OPEC members to follow suit and increase RMB usage, according to Lin Boqiang, head of the China Institute for Studies in Energy Policy at Xiamen University.
According to the macroeconomic research team of China Merchants Securities, the internationalization of a currency is mainly measured by international payments, foreign exchange reserves and pricing of commodities. The RMB has made progress in all the three areas, which is especially noticeable after the COVID-19 pandemic.
On March 28, China’s national oil company CNOOC and France’s TotalEnergies settled the first yuan-denominated trade for liquefied natural gas via the Shanghai Petroleum and Natural Gas Exchange. About 65,000 metric tons of LNG imported from the United Arab Emirates was traded under this settlement.
The seven yuan-denominated futures contracts for crude oil, iron ore, copper and palm oil launched since 2018 have served as important benchmarks for commodity settlements in the RMB, said Wang Jiaqiang, a senior researcher from the BOC Research Institute, a unit of Bank of China.
CIPS, the independent payment system developed by the PBOC, provides clearing and settlement services for overseas institutions’ cross-border RMB deals and offshore businesses. CIPS not only meets the RMB transaction demand in international economic, trade and financial exchanges, but also provides the infrastructure for the RMB’s internationalization, said Xu Zaiyue, president of CIPS Co Ltd, the company that undertakes CIPS’ development and maintenance.
The Chinese currency’s wider participation in CIPS can also reflect to which degree it has been internationalized, he said.
Officially launched in early 2012, CIPS has been connected to financial institutions in more than 30 countries. In mid-February, the National Bank of Cambodia, the country’s central bank, announced it was looking to join CIPS to boost trade, investment and tourism between the two countries through yuan-denominated transactions and to make management of the Chinese currency in the country’s international reserves easier.
In 2009, China started promoting the RMB’s internationalization by making the first cross-border settlement in yuan. In a news conference in early March, Pan Gongsheng, the PBOC’s vice-governor, said the RMB has built a preliminary network for international use over the past decade or so amid the establishment of RMB clearance banks, the development of offshore RMB market, continued opening-up of the domestic financial market and Chinese financial institutions’ overseas expansion.
“At present, the internationalization of the RMB faces better opportunities and a more amiable environment in general,” said Pan.
On the one hand, a “de-dollarization” trend has been sweeping a large part of the world in recent years. At a summit in March, the finance ministers and central bank governors of ASEAN agreed to reinforce regional currencies in the region and be less dependent on foreign currencies such as the US dollar.
In late January, officials of Brazil and Argentina said they had considered creating a common currency for the two economies. The UAE and India are negotiating a shift away from the dollar, using the Indian rupee in trade of non-oil commodities, according to Reuters. For the first time in 48 years, Saudi Arabia has indicated its openness to trading in currencies other than the US dollar.
As Wang of the BOC Research Institute explained, the US dollar has been more frequently used as a financial weapon and sanction tool amid geopolitical conflicts over the past few years. It has seriously affected the international image of the greenback.
Meanwhile, the aggressive monetary tightening adopted by the US Federal Reserve last year, which was short-term, highly frequent and large-scale, has resulted in high volatility of the US dollar. The global capital market has been shaken as a result, leading to credit crises at major banks such as Credit Suisse and Silicon Valley Bank, he said.
On the other hand, the RMB’s exchange rate has remained generally stable, thanks to China’s prudent macroeconomic policies, stable economic growth, relatively lower inflation rate and steady growth in outbound investment. The stability of the RMB’s value has consolidated the Chinese currency’s credibility in the global market, attracting investors and traders from all over the world, he said.
In light of the tightening credit environment in Europe and the United States, the financing value of the RMB has been increasingly noticeable, said Ming Ming, chief economist at CITIC Securities.
As central banks look to diversify their foreign exchange reserves, the RMB is likely to see its weighting as a reserve currency further increase, said Ming.
In August 2022, the International Monetary Fund raised the weighting of the RMB in the basket of currencies that make up the Special Drawing Rights, an international reserve asset also known as the SDRs, by 1.36 percentage points to 12.28 percent.
Still, much more needs to done to further increase the RMB’s international significance, experts said.
Although the RMB retained its position as the fifth most active currency for global payments by value based on SWIFT’s February data, the Chinese currency only accounted for 2.19 percent of the global market share, while the US dollar still dominated with a 38.43 percent share of all global payments.
The RMB’s growing internationalization can be more deeply integrated with initiatives such as the Belt and Road Initiative. Bilateral settlements in local currencies can be promoted for commodities trade, said Zhang Jingjing, chief macroeconomic analyst for China Merchants Securities.
More yuan-denominated green finance products should be developed to nurture more demand for RMB trading. A multilateral bridge connecting central bank digital currencies among Asian economies can be built so that digital solutions can facilitate the RMB’s internationalization, she said.