In the post-pandemic era, the easing monetary policy promoted by the United States is impacting the global economy, especially the emerging market economies. Since Joe Biden took office, the U.S. has further increased fiscal stimulus on top of previous monetary easing to promote the U.S. economic recovery. In this process however, the strong U.S. dollar policy is triggering a chain reaction of "taper tantrum" that is further diverging the global monetary environment. As ANBOUND once pointed out, the geopolitical development of the international monetary system is showing an obvious trend. This makes the internationalization of the RMB faces a window of opportunity again. However, different from the process of RMB internationalization after the 2008 financial crisis, the current international financial and economic situation, especially the geopolitical situation, has undergone tremendous changes. In the face of new opportunities, RMB internationalization still needs to advance steadily and any overly optimistic and aggressive approach should be avoided.
In the context of the initial formation of U.S.-China strategic competition, the development of RMB internationalization is becoming more and more important. This is not only necessary to maintain the stability of China's domestic economy, but also to create new trade and investment space for the construction of a "dual circulation" development pattern under the new circumstances. The change in the U.S. dollar will have an impact and constraint on the RMB exchange rate and the Chinese economy. Researchers at ANBOUND have suggested that it is necessary to maintain moderate flexibility in the RMB exchange rate against the U.S. dollar as the dollar's volatility increases. This requires the internationalization of RMB to expand the international circulation of RMB. At the same time, with the change of U.S. monetary policy and its strategy towards China, China's "international circulation" that used to rely on the U.S. dollar is facing great risks and instability, which will affect China's foreign trade and investment pattern.
It is worth noting that while the U.S. dollar still dominates the post-pandemic period, its influence is slowly waning. According to the International Monetary Fund (IMF), the dollar's share of global foreign exchange reserves fell to its lowest level in 25 years in the fourth quarter of last year. The dollar's share fell from 60.5% in the third quarter to 59% in the fourth, the third straight quarterly decline. Nevertheless, reserves held in dollars rose to USD 7 trillion, compared with USD 6.939 trillion in the third quarter. The euro's share, meanwhile, rose to 21.2% in the fourth quarter, the highest level since 2014, compared with 20.5% in the third quarter. The Japanese yen's share of foreign exchange reserves also rose to 6.03% in the fourth quarter of 2020, the third consecutive quarterly increase. The RMB's share rose to 2.25% in the same period, up for the fourth consecutive quarter. Meanwhile, IMF data shows that global foreign exchange reserves rose to a record USD 12.7 trillion in the fourth quarter from a revised USD 12.246 trillion in the third quarter. This means that countries are actively stockpiling foreign exchange reserves to cope with the changes in the wake of the pandemic. At the same time, some countries have noticed the risk of the dollar and have begun to promote the diversification of their foreign exchange reserves.
This presents new opportunity for the RMB. Statistics show that up to now, more than 40 countries, including Russia, Germany, the United Kingdom, Japan, Vietnam, Singapore, and Canada, have started to decentralize the dollar in different ways, mainly by expanding local currency settlement, reducing the use of dollar assets, optimizing the structure of foreign exchange reserves, increasing gold reserves, etc. This kind of change actually reflects the trend of geo-politicization of the international monetary system.
However, the weakening of the dollar’s position does not mean that the internationalization of the RMB can advance rapidly. According to SWIFT's data, the RMB's share in global payments has been roughly around 2% from 2016 to date, maintaining its ranking at around fifth place globally. In February this year, the RMB's share in global payment accounted for 2.2%; the shares of USD, EUR, GBP, and JPY ranked in the top 4 with 44.10%, 30.84%, 6.41%, and 3.98% respectively. It can be seen that although the RMB is included in the IMF Special Drawing Rights and has the status of international payment currency, there is still a big gap between RMB and mainstream currencies such as the U.S. dollar and euro. Although China has established the Cross-border Interbank Payment System (CIPS), there is still a significant gap with SWIFT in terms of popularity and transaction volume. The internationalization of RMB still faces the issue of recognition and trust in the international market.
China has now started local currency settlement in oil trade with countries such as Russia, Iran, and the United Arab Emirates. Promoting the use of the RMB in areas such as energy trade is a best-case scenario. These circumstances also show that RMB internationalization still needs to be advanced in a way dictated by geopolitical and economic conditions. In particular, RMB can make use of regional trade agreements such as RCEP to seek incremental space for trade and investment within the framework of geo-economics and through the geopolitical strategy of the "Belt and Road Initiative".
In fact, the internationalization of the RMB is not about getting rid of the dollar, nor should it be about gaining geopolitical influence. With the dollar still dominating, the bulk of international trade and investment still needs to be settled in dollars. The internationalization of the RMB needs to open up new incremental space under this pattern and meet the needs of both sides in a "natural" way. Zhou Chengjun, director of the People's Bank of China's finance research institute, once said that RMB internationalization is not an attempt to replace the U.S. dollar. Instead, RMB internationalization is a very important means and measure to adapt to the next step of China's economy in the global supply chain layout and realize the optimization of the value chain and industrial chain. It is a natural process.
It is widely believed that China's controls on capital flows are holding back the internationalization of the RMB. However, in addition to the issues such as free convertibility and capital account liberalization that have attracted international attention, the internationalization of RMB still faces shortcomings in various aspects such as payment and valuation, which means that the internationalization of RMB still has a long way to go. For example, in Russia, which has been the most active in de-dollarization, after years of development, the euro accounted for 30% of the trade settlement between China and Russia in 2020, while the local currency accounted for 24%. Russian experts said that the idea of de-dollarizing trade settlement between Russia and China has existed for a long time, but Russia's main exports to China are oil and metals, which are priced in dollars on the international market, making it difficult to achieve a non-dollar settlement in the short term. This means that the de-dollarization of Russian-Chinese trade is bound to be a long-term process.
These issues show that in addition to promoting two-way capital account liberalization, there are still a lot of systemic frameworks to be built, including the construction of RMB futures market, RMB-denominated commodity market, RMB financial market, and RMB payment and settlement system. In the absence of a complete infrastructure and regulatory system for RMB internationalization, rashly promoting the capital account liberalization to push for RMB internationalization will lead to an intensification of capital flows, thus affecting the stability of Chinese finance and economy.
Final analysis conclusion:
The need to internationalize the RMB has become more urgent in the face of changes in U.S. policy and increased volatility in the dollar. However, under the new international situation, the internationalization of RMB needs to be firmly pursued. With the continuous improvement of the RMB monetary system, the internationalization of RMB should be steadily promoted in line with the geo-economic development.
