The internationalization of the Chinese yuan, or the renminbi, is a continuous endeavor that is currently at a critical stage of significant progress.
On the one hand, the acceleration in renminbi internationalization is an inevitable trend over the long term as the country’s strategic goal of sharpening financial strength requires a strong local currency as the primary pillar.
The third plenary session of the 20th Central Committee of the Communist Party of China underscored the importance of promoting high-standard opening-up of the financial sector and planned strategies for enhancing financial strength from multiple dimensions.
The country’s strategic aspirations provide a solid, long-term foundation for the renminbi’s steady ascent on the global stage.
On the other hand, this is the right time to accelerate renminbi internationalization based on short-term factors, amid a rapid shift in domestic and international economic and financial policies.
Starting late September, the United States embarked on a rate-cutting cycle with a larger-than-expected rate cut, while China announced a series of substantial expansionary fiscal and monetary measures.
Global financial markets reacted swiftly, with Chinese financial assets gaining capital inflows, creating a timely window for the renminbi to make significant strides in internationalization.
From my perspective, the “east wind” — which in Chinese culture symbolizes the catalyst for a major change or a harbinger of a new phase — is right at the back of renminbi internationalization, signaling a future full of promise.
First, high-level financial opening-up has laid a solid foundation for the steady internationalization of the renminbi.
The pace of China’s financial market opening-up has notably accelerated since 2018, lifting the global heft of China’s capital markets. The bond market, for instance, experienced a gradual shift in capital flows from the second half of 2023, with a particularly significant increase in net cash inflows starting from the fourth quarter of last year.
China is committed to further improving financial market connectivity and refining qualified foreign institutional investor systems, aligning with international standards, enhancing market transparency and strengthening investor protection. The positive effects of China’s high-quality economic development and high-level financial opening-up will continue to reinforce each other in the future.
The continuous opening-up of China’s financial markets and the increased convenience of renminbi cross-border use have facilitated the transformation of the renminbi from a trade settlement currency to an investment and reserve currency.
According to the International Monetary Fund, the share of the renminbi in global official allocated foreign exchange reserves had risen from 1.07 percent in 2016 to 2.14 percent by the end of the second quarter of this year, reflecting the growing status of the renminbi in the global monetary system.
The third plenary session of the 20th CPC Central Committee called for pushing forward the development of a homegrown, controllable cross-border payment system. The Cross-Border Interbank Payment System, or CIPS, is expected to continuously improve and the use of the renminbi in economies participating in the Belt and Road Initiative is likely to increase further, which will mark significant progress in renminbi internationalization.
Second, flourishing offshore renminbi markets have provided a stepping stone for the currency’s global advancement.
Offshore renminbi markets have shown unprecedented vitality and dynamism in recent years. Hong Kong, the world’s largest offshore renminbi hub, holds over 1 trillion yuan ($140.3 billion) in renminbi deposits, official data showed. Hong Kong’s renminbi bond market is also substantial, offering international investors a diverse array of renminbi asset allocation options and further solidifying its position as the gateway for renminbi internationalization.
Meanwhile, London, Europe’s most important offshore renminbi center, continues to expand its renminbi services. The renewal of the bilateral currency swap agreement between China and the United Kingdom in 2021, worth tens of billions of British pounds, demonstrates a mutual commitment to deepening financial cooperation.
Other offshore renminbi centers like Singapore, Frankfurt and Paris each contribute their unique strengths, forming a diversified global network of offshore renminbi hubs. They excel in different areas, such as promoting cross-border renminbi usage, providing renminbi financing channels and driving renminbi product innovation, collectively constructing a more comprehensive and expansive platform for the renminbi’s international journey.
Third, the digital wave has unlocked potential space for internationalization of the renminbi as financial innovation becomes a key driver of changes in the global monetary system.
China, one of the first major economies to initiate the development of a digital currency, has achieved significant milestones in the research and application of the digital renminbi, or e-CNY, paving a new digital avenue for renminbi internationalization.
The digital renminbi pilot program has covered 26 pilot areas across 17 provincial-level regions, including various scenarios such as retail consumption, public services and transportation. In Shanghai alone, more than 1.4 million digital renminbi pilot application scenarios have been implemented.
These figures demonstrate the broad application and acceptance of the digital renminbi in the domestic market, laying a foundation for its digital internationalization.
In the realm of cross-border payments, Shanghai, as an international financial center, plays a central role in promoting the cross-border application of the digital renminbi, advancing digital renminbi trials in cross-border scenarios like trade, investment and finance.
For instance, through collaboration with offshore renminbi centers like Hong Kong and Singapore, cross-border remittance and trade settlement tests of the digital renminbi have significantly increased transaction speeds, reduced fees and enhanced transparency and traceability, offering new solutions to traditional cross-border payment challenges.
The cross-border application of the digital renminbi also focuses on serving economic and trade exchanges under the Belt and Road Initiative. By interfacing with local payment systems, the digital renminbi offers new payment options for small-scale trade and tourism consumption in economies involved in the BRI, helping to enhance the circulation and influence of the renminbi within the region.
The open stance of the digital renminbi on the international stage is also remarkable. The People’s Bank of China is strengthening cooperation with other central banks and international organizations surrounding issues such as the exchange mechanisms between the digital renminbi and foreign currencies and cross-national regulatory coordination. This aims to build a more inclusive and orderly international digital currency ecosystem.
This open and cooperative approach has not only fostered international understanding and acceptance of the digital renminbi but also opened up new viable avenues for the renminbi to go global.
The writer is chief economist at ICBC International Holdings Ltd, a wholly owned subsidiary of Industrial and Commercial Bank of China in Hong Kong.
The views do not necessarily reflect those of China Daily.