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Central bank report on yuan/RMB internationalization since 2017
“One currency’s internationalization is a long-term process resulting from a country's comprehensive strength and financial market development.” So maybe there isn't a rush.
Pekingnology today presents a translation of 《坚持改革开放和互利共赢 人民币国际化稳步推进》Adhere to the Reform & Opening-up and Win-win, Steadily promote RMB Internationalization by the 宏观审慎管理局 macro-prudential policy department of the People’s Bank of China.
The article, via the central bank’s biweekly magazine《中国金融》 China Finance, is a de facto report of the progress in the Chinese yuan’s internationalization. It was published on October 9, 2022, before the 20th National Congress of the Communist Party of China.
Together with some other de facto reports by various departments within the PBoC, the series of articles was, in essence, official summaries of their work for the past five years - since the 19th Party Congress in 2017. In that sense, the timing was not unusual.
One line from the report stands out because it signals the PBoC isn’t exactly in a rush on RMB internationalization or determined to meet a set of lofty, specific targets.
One currency’s internationalization is a long-term process resulting from a country's comprehensive strength and financial market development.
This is the fourth article in the series that Pekingnology has translated, after
Adhere to the Reform & Opening-up and Win-win, Steadily promote RMB Internationalization
Since the 19th National Congress of the Communist Party of China (CPC), the People's Bank of China (PBoC) has adhered to the guidance of Xi Jinping Thoughts on Socialism with Chinese Characteristics for a New Era, resolutely implemented the decisions of the CPC Central Committee and the State Council, and followed the requirements of The 14th Five-Year Plan that "insist on being market-driven and respecting the choices of enterprises, and create new types of mutually beneficial cooperative relationships based on the free use of RMB." PBoC also complies with the principles of reform and opening up, mutual benefit, win-win cooperation, balancing the relationship between development and security, respecting the market's direction, responding to demand, step-by-step, and making risks controllable. It also focuses on improving the convenience of RMB in cross-border trade and investment and steadily and prudently promotes RMB internationalization.
First, focus on improving trade and investment facilitation and constantly enhancing the payment function of the RMB.
The use of RMB by domestic enterprises in cross-border trade and investment allows "no middlemen to enjoy the price difference" (a famous advertising slogan of Guazi, China's largest online used car sales site) in the settlement, which can reduce exchange rate risk and exchange costs. PBoC has issued several policies to support RMB settlement in cross-border trade and investment, guiding banks to simplify the business process and provide quality cross-border RMB financial services to ensure that the policy can actually benefit companies.
As the RMB exchange rate becomes more flexible and bi-directional fluctuations become the norm, the demand of market entities to use RMB in cross-border trade and investment to reduce currency mismatch risks is also growing. In 2021, the amount of RMB cross-border receipts and payments by Chinese banks on behalf of clients in RMB was 36.6 trillion RMB, up 29% year-on-year, accounting for 47.4% of the total cross-border receipts and payments in domestic and foreign currencies in the same period.
From January to August 2022, the amount of RMB cross-border receipts and payments by Chinese banks on behalf of clients was 27.8 trillion RMB, up 15.2% year-on-year. That’s 49.4% of the total cross-border receipts and payments in domestic and foreign currencies in the same period, also an increase. In terms of distribution across countries, from January to August 2022, up to 220 foreign countries (or regions) were engaged in cross-border RMB receipts and payments business with enterprises or individuals in China.
Second, deepen the financial market's high-level opening-up and continue strengthening the function of RMB investment and financing.
PBoC, together with relevant departments, adhered to the principles of gradual and controllable opening-up and balancing efficiency and security, emphasized top-level design and comprehensive arrangement, and continuously improved the degree of opening up of financial markets.
Connections such as Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect, mutual recognition of funds, bond connect, and Shanghai-London stock connect have been successively opened and continuously optimized. The regulatory policy framework for qualified investors has constantly been improved, making it more convenient for overseas investors to invest in China’s domestic financial markets. At the end of August 2022, the total financial assets held by foreign institutions in domestic financial markets, including stocks, bonds, loans, and deposits, amounted to nearly 10 trillion RMB. Thanks to the deepening of the opening up of the financial market, the function of RMB investment and financing has improved rapidly. The share of securities investment in cross-border RMB receipts and payments increased from about 30% in 2017 to about 60% in 2021.
Third, meet the needs of reserve assets diversification and steadily enhance the reserve currency function of RMB.
In recent years, the demand for RMB reserves held by central banks worldwide has increased significantly, benefiting from the trend of reserve asset diversification and the inclusion of RMB in special drawing rights (SDR). To facilitate the allocation of RMB assets by overseas central bank-type institutions, PBoC has continuously optimized the procedures for overseas central banks to invest in bond markets and improved the capabilities of Chinese agents on investment for overseas central bank-type institutions. At present, more than 80 overseas central banks or monetary authorities have included RMB in their exchange reserves. According to the data of the International Monetary Fund, as of the end of the second quarter of 2022, the size of RMB reserves held by global central banks was 322.38 billion USD, accounting for 2.88%. The figure is up 1.8 percentage points from the year when RMB first joined the SDR in 2016.
Fourth, promote the opening-up of the commodities and futures market to the outside world in an orderly fashion and gradually strengthen the denominating function of RUMB
Currently, the customs, commerce, foreign exchange, and other departments have used RMB in the statistics, accounting, and management of overseas economic activities. A new survey by the Bank of China shows that 21% of the domestic enterprises in industries and commerce said they had started to use RMB quotes in cross-border transactions. In recent years, the trading volume and open interests of Shanghai crude oil futures have grown relatively fast. Seven specific varieties of trading futures, such as crude oil and iron ore in China, have shown a stable development momentum.
After more than ten years of development, RMB internationalization has shown great vitality. Currently, nearly half of the cross-border transactions carried out by financial institutions, enterprises, and individuals in China are settled in RMB. Deposits in the major offshore RMB market amounted to approximately 1.5 trillion RMB, and RMB-denominated financial products have become increasingly abundant. In May 2022, the International Monetary Fund further increased RMB's weight in the SDR from 10.92% in 2016 to 12.28%, reflecting the international community's recognition of the increased free-use of RMB.
In general, the RMB internationalization process shows the following features:
First, adhere to a market-driven approach, and success will come when conditions are ripe.
After the international financial crisis in 2008, in line with Chinese companies engaged in foreign trade's rising demand for RMB, a series of measures were introduced to facilitate RMB cross-border trade settlement, with RMB cross-border settlements increasing from less than 10 billion RMB in 2009 to 12.7 trillion RMB in 2015. Since 2017, with the acceleration of domestic financial markets opening up, RMB bonds have been included in the three major international bond indices (WGBI, BBGA, and GBI-EM). China adheres to its normal monetary policy, and the share of securities investment in RMB cross-border receipts and payments has increased significantly, which has become an important driving force for cross-border RMB use.
Second, stick to the reform and opening-up principle, and the mutual benefit and win-win cooperation strategy.
The enhanced RMB internationalization has enriched the currency choices of foreign entities in trade, investment and financing, and financial transactions, helping them diversify their asset allocation and risk. They can also better share the dividends of China's economic development and the achievements of reform and opening-up principle.
The PBoC has established currency swap arrangements with the central banks and monetary authorities of 40 countries and regions. The swap funds can be used to support trade and investment, as well as to maintain regional financial stability. The development of the RMB offshore market has added new vitality to international financial centers such as Hong Kong, Singapore, and London. The use of RMB in neighboring and Belt and Road Initiative countries has injected 活水"fresh water" (meaning fresh and constant power; coming from the ancient Chinese poem The Book by Zhu Xi, "How could it be so clear and cool? For fresh water comes from the source.") to local economic development. This fully reflects the characteristics of mutual benefit and win-win cooperation.
Third, safeguard the bottom line on risk, and coordinate development and security.
In response to the risk of possible pro-cyclical fluctuations in cross-border capital flows, the PBoC established a sound framework of macro-prudential management of cross-border capital flows (Pekingnology). It gradually improved the self-regulatory mechanism of financial institutions and formed a market-tested policy toolbox for counter-cyclical adjustment and prevention of cross-border capital flow risks. Macro-prudential management and micro-supervision cooperate in firmly safeguarding the bottom line on risk.
One currency’s internationalization is a long-term process resulting from a country's comprehensive strength and financial market development. The gradual internationalization of the RMB is a historical necessity of China's national strength and reform and opening up. The RMB's international status enhancement also reflects the international community's confidence in China's economic development. PBoC will continue to steadily promote RMB internationalization and serve to build the new development paradigm of "dual circulation" and achieve high-quality economic development.
First, continue to do a good job in system design, policy support, and market cultivation. Strengthen the synergy between domestic and foreign currencies to enable market entities to use RMB more frequently and conveniently in foreign trade and investment. We shall promote innovation in RMB cross-border investment and financing business with emphasis in the pilot free trade zones/free trade port (Hainan), the Guangdong-Hong Kong-Macao Greater Bay Area, and within the framework of building Shanghai to be an international financial center.
Second, promote the transformation of the financial market to a comprehensive system-based opening and improve the liquidity of RMB financial assets. Further simplify the investment process for foreign investors to enter the Chinese market, enrich the types of investable assets, and make it easier for central bank-type institutions to allocate and hold RMB assets.
Third, continue to steadily promote bilateral cooperation in currency swap and settlement between central banks, give full play to the role of currency swap in supporting the development of offshore RMB market and facilitating trade and investment, and explore local currency settlement (LCS) cooperation with other ASEAN countries and neighboring countries. We will promote direct RMB transactions with relevant national currencies and support overseas countries and regions to develop local RMB foreign exchange markets.
Fourth, continue to improve the supply process for offshore RMB liquidity, enrich the product system of Hong Kong and other offshore RMB markets, and promote the formation of a virtuous cycle in the onshore and offshore RMB markets. As for clearing banks, we will optimize their distribution and presence, strengthen the policy support, and give full play to their positive role in fostering the offshore RMB market. (Enditem)
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