The Internationalization of RMB
Every day, there are new materials on the issue of conversion of the Chinese currency into an international currency. However, different authors have various understandings of this process. The majority of financial experts think that for the Chinese government, it is necessary to make a decision on full convertibility of the currency. According to Samar Maziad and Joong Kang (2012), “In general, currency internalization could provide a number of advantages to the country” (p. 1). Thus, the renminbi will turn into a full-fledged international currency. Nevertheless, there are people who consider that RMB has already become an international currency, resulting in great numbers of increasing scale of the usage of this currency in international trade. Other financial experts have an opinion that for the Chinese government, it is not beneficial to change RMB into an international currency. There is even a belief that the government prevents the currency’s transformation on purpose. In such a way, a problem of transformation of RMB into an international currency causes much controversy.
The complication of the problem of transformation of the renminbi in an international currency consists in the fact that the movement of the renminbi in the direction of internationalization includes several steps: the transformation of the Chinese currency in currency trading, an investment currency, and reserve currency. The procedure of the transformation of RMB into an international trading currency started after the financial crisis of 2007-2009 that showed the infirmity of the main international currencies – euro and dollar (Kawai, Park, & Wyplosz, 2015). The United States has been and remains an important trading partner of China. Thus, the US dollar is the only currency in the foreign trade of China with the United States. In 2008-2009, there were the initial moves towards internationalization of the RMB (Kawai et al., 2015). A number of enterprises were allowed to use this currency in trade with Macau and Hong Kong. In mid-2009, about 300 enterprises used the renminbi in foreign trade transactions (Kawai et al., 2015). Moreover, at the end of 2010, their number grew to more than seven thousand companies (Kawai et al., 2015). In 2012, all the Chinese companies, which had a license to import and export operations, could use the renminbi (Kawai et al., 2015).
The active passage to foreign dealing in RMB occurs along with the expansion of the usage of national currency’s trading partners of China. Signing the bilateral swaps of the central banks of the countries that are China’s trading partners with PBC facilitates this. To date, a number of active agreements of PBC on currency swaps exceed 20 (Narayanasamy, 2014). If, in 2010, only 3% of China’s trade was conducted in RMB, in late 2013, this index amounts to 18% (Narayanasamy, 2014). Besides, according to the forecasts, this proportion will increase to 30% by 2018 (Narayanasamy, 2014). In 2014, the renminbi bypassed the euro on scales of payments, serving international trade (Narayanasamy, 2014). It is noteworthy that the renminbi was used in the dealings with the United States, although its share in the bilateral Sino-US trade was extremely small (Narayanasamy, 2014). Another initiative of the Chinese government is a pilot program of cross-border mediation renminbi of trade agreements. Firstly, it spread to the Shanghai business companies and entities, as well as banks of 4 cities in Guangdong province, and later – to Hong Kong. In the book RMB: Towards Internationalization, the author states that “RMB settlement in cross-border trade is a crucial step in the RMB’s internalization” (Cheng, 2015, p. 347). In general, the promotion of transnational trade settlement operations contributed to the completion of the first step in the internationalization of RMB. The introduction of pilot settlement items on direct investment in RMB abroad provided the impetus for the formation of structure, in which the internationalization of the renminbi was realized at the level of trade and capital (Cheng, 2015).
In December 2010, the Central Bank of China starts an experimental point for international settlements in RMB in Xinjiang (Wang, Lai, & Yen, 2014). Since 2012, an experiment has spread to the entire territory of China. The Chinese government has continued to implement new financial products expressed in RMB. Later, the offshore renminbi market was founded. This fact has opened a new opportunity to invest the renminbi, as well as domestic investment of the yuan from foreign accounts. Another initiative of the government is the emission of government bonds in RMB, which has been authorized in Shanghai and Hong Kong. The Chinese government also offers subsidized loans to foreign countries in RMB inheriting the experience of Japan. For example, in 2009, 4.65% of total amount of credits were provided in RMB outside of China, mostly in Hong Kong (Wang et al., 2014).
The position of the Chinese currency in total international turnover of currencies is more modest. In addition to servicing of trade with services and goods, RMB is used to be exchanged for other currencies and for all sorts of investment and credit transactions. In 2004, the renminbi was only the 35-th among the currencies on the total volume of international traffic (Wang et al., 2014). In early 2012, it rose to the 13th place. In early 2014, the Chinese currency occupied the 7th place, taking the lead over the Swiss franc (Wang et al., 2014).
The positions of the renminbi in the common international currency turnover are largely dependent on its convertibility. At present, it is partial convertibility. It means that it can be used in current operations, primarily in trade deals. The partial conversion was conducted in 1996 (Kawai et al., 2015). Then, the government stated that it would take another ten years to move to full convertibility of the renminbi and hold the abolition of restrictions on capital transactions. However, more than 15 years have passed but such restrictions still exist. The change of RMB into a convertible currency will greatly improve the scope of use of this currency in the global foreign exchange turnover. However, it will only have a short-term effect. Recently, RMB had a fixed rate. It was a mean of active foreign trade expansion of China. However, at the beginning of the XXI century, the government of China rejected to contribute the exchange rate. In such a way, RMB formally became free but adjustable. PBC deals with the regulation (Kawai et al., 2015). The bank systematically and persistently buys euros, dollars, and other currencies. Thus, it artificially constrains the growth of the renminbi exchange rate. PBC holds it at a significantly more inferior rate than the purchasing power parity of the dollar and RMB. If to introduce the complete convertibility of the Chinese currency, there can be a risk that the PBC will lose control over the course of exchange of its currency. It threatens the complete collapse of the current model of the Chinese economy, based on trade expansion. The Chinese economy, within the current undervaluation of the renminbi, already faces certain challenges. The world market is saturated with products from China and the further export expansion is difficult. The issue of the RMB exchange rate regime should depend on the future model of the Chinese economy. Unfortunately for China, in the country’s leadership, there is no complete clarity and consensus on this matter. Without a clear and coherent long-term strategy of economic development of the country, the transition to free convertibility of the renminbi threatens with serious risks (Kawai et al., 2015).
Chinese experts identify three periods of internationalization of the renminbi. During the first one that is continuing up to now, the yuan becomes a currency by which international trade settlements occur. The next 10 years of development, followed by a gradual weakening of capital controls, the yuan will become an important international investment currency (Kawai et al., 2015). According to the forecasts of the experts, the last stage of internationalization of RMB will be in 2030 (Kawai et al., 2015). At that time, it can become a global reserve currency.
One of the conditions of internationalization is the fact that debtors from other countries must be prepared to have liabilities denominated in RMB on the balance sheet. However, under the conditions of the undervalued value of the renminbi and the risk of exchange rate fluctuations against the US dollar, it will be extremely difficult to force debtors to transfer the debt into RMB. Modern China’s monetary policy can also be explained as an attempt to offer the world an alternative source of financing in the form of loans in RMB (Wang et al., 2014). However, if the foreign partners will not consider the yuan as a stable currency, the prospects for its internationalization are doubtful.
The internationalization of the renminbi is one of the favorite topics for discussion in recent years. It is one of the key challenges for Chinese economy. The topic of internationalization of the Chinese currency in recent years is extremely relevant because of the ever-growing influence of the People’s Republic of China on the elaboration of the world economy, in general, and the economies of individual countries – trade partners of China, in particular. The government of the country is willing to provide full convertibility of the renminbi. In such a way, in ten years, RMB can become a global reserve currency.