Recent reports highlighting RMB internationalisation as an impending push towards global de-dollarisation should be understood within the bounds of the RMB’s current limitations. This will be a slow progression towards alternative viability rather than a pressing challenge to USD hegemony.
On 24 September 2022, China’s central bank, the People’s Bank of China (PBOC), released their 2022 RMB Internationalisation Report. The report outlines that the long-term goal of RMB internationalisation has achieved great strides in cross-border payments, driving global foreign exchange (FOREX) reserves, and the May 2022 decision by the IMF to increase the weight of the yuan to 12.8 percent within the basket of currencies making up its Special Drawing Rights (SDR). To be clear, the discrete gains towards currency internationalisation highlighted in this report have only increased in the past year. This is due in large part to China’s ability to both capitalise on and prompt strategic shifts in sovereign monetary policy as evinced through its bilateral relationship with Russia, and its bolstered economic partnership with Brazil, whose leader Luiz Inácio Lula da Silva recently vocalised a challenge to USD hegemony within the international monetary system (IMS).
Given this trend toward increasing RMB internationalisation, it would be worthwhile to understand the pursuit as a long-term aim for China’s leaders – one whose post-2008 orientation has witnessed efforts to cement the RMB as a viable alternative keystone currency within the IMS. Understanding this trend from such an angle provides a clearer framework to assess the current progress and continued limitations of RMB internationalisation as it relates to key benchmarks of currency internationalisation.
As result of the internal shocks experienced by China’s economy during the 2008 financial crisis, leaders in China have been keen to mitigate domestic economic risk by pursuing de-dollarisation through various efforts aimed at promoting RMB internationalisation. This process can be viewed through efforts to promote RMB-denominated trade settlements and financial transactions, building a global web of RMB financial infrastructure and networks, and pushing the reform of the current dollar-based IMS. To clarify, these risks were understood in relation to both the USD’s dominance as a global reserve currency, as well as its own outsized USD central bank holdings – a point that will soon be made salient. Moving forward, according to a 2021 report by the US Congressional Research Service (CRS), both China and Russia have been involved in a decade-long effort to “de-dollarise” as a means to “shield their economies from U.S. sanctions, reduce exposure to the effects of U.S. economic and monetary policy, and assert global economic leadership.” Thus, while de-dollarisation has not been expressly framed as an explicit goal of China’s RMB Internationalisation efforts: “A primary motivation is to reduce its dependence on the dollar.”
The alternative trajectory of RMB Internationalisation
It has been said that China began the process of RMB internationalisation in 1993 with the goal of achieving full currency convertibility by the end of the century. However, this process was hampered by the 1997 Asian financial crisis, which witnessed China drop full currency convertibility as a target goal. Currency convertibility was once considered a requisite standard for currency internationalisation. However, despite strict capital controls, China has been able to successfully eschew this erstwhile requirement due to its deft navigation of two global economic crises as well as its increasing share of global trade and GDP. Specifically, by 2009, China had surpassed Germany as the second largest exporting country, and by 2010, China had surpassed Japan to become the world’s second-largest economy.
The diminished importance of currency convertibility was extended to the IMF’s definition of a “freely usable currency,” which some argued was politicised and subsequently relaxed to ensure the inclusion of the yuan into the SDR in October of 2016. Regardless of its lack of full convertibility (convertible for current account but not capital account), its inclusion into the SDR has “made the RMB freely usable abroad while securing its overseas importance in overseas reserves.” In this way, RMB internationalisation has followed a different trajectory. Rather than through access to its capital markets, the rise of the RMB as a benchmark reserve currency has been secured by China’s total share of global exports (the IMF’s “export criterion”), its share of global GDP, and the increasing proportion of yuan-denominated, cross-border trade settlements.
However, it should be noted that this process of currency internationalisation is linked to a mediated framework of free usability, one which hinges on a stable RMB exchange rate that is paradoxically linked to China’s continued holding of USD reserves.
Current standing of RMB Internationalisation
The abovementioned CRS report highlights China’s issuance of a digital fiat currency as a core facet of RMB internationalisation. In fact, in 2021, director of the PBOC’s Digital Currency Research Institute (DCRI) Mu Changchun stated that issuance of the e-CNY would serve to propel “the internationalization of the RMB and reduce dependence on the global dollar system.” That being said, the internationalisation of a currency represents a complex proposition that includes “Forex trading, Forex reserves, share of cross-border trading, and capital flows.” While RMB internationalisation has made many strides over the past few years, it has a long way to go before it constitutes a suitably attractive alternative to the USD.
As of 2023, Forex trading of RMB has made significant gains, taking a 7 percent market share of all trades in 2022, a 4 percent jump that remains well behind the US’s 88 percent share of Forex trades. Moreover, while up from 2 percent in 2021, as of February 2023 the RMB constituted just 3 percent of global Forex reserves. This is compared to the 60 percent share held by the USD. Increasing from a total share of 14.7 percent in 2021, the total share of RMB denominated cross-border trade settlements jumped to 16.6 percent in the first half of 2022, whereas approximately 50 percent of all cross-border trade was invoiced in USD. In regard to capital flows as an important metric of currency internationalisation, China remains noteworthy for its continued reliance on stringent capital controls, a fulcrum of sovereign monetary policy designed and utilised to both protect domestic industries and avoid capital flight.
Overall, despite its impressive gains, the RMB’s artificial valuation (+/- 2 percent band), in conjunction with capital controls (restricting domestic investment abroad alongside foreign investment in China’s financial markets), continues to call into question its free usability and will continue to hinder RMB internationalisation. However, most critically, China’s continued reliance on a form of RMB internationalisation without capital account liberalisation that requires the RMB to be backed by USD reserves (59 percent of total as of 2016) will continue to detract from its viability as an alternative keystone currency within the IMS.
Benjamin Green, Ph.D., is an Assistant Professor in the College of Teacher Education at Beijing Language and Culture University. His recent works have focused on US-China relations, educational governance, digital nationalism, critical cosmopolitanism, and Chinese Internationalism as a contested project of alternative modernity; Bgreen@blcu.edu.cn.
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