Amid the negative spillovers of the United States' sharpest monetary tightening in decades, calls for shifting toward a multipolar international currency system have gained more attention this year — and so has the role of the renminbi in the transformation.
Although the renminbi felt depreciation pressure brought by a strong greenback as much as other non-dollar currencies did, the Chinese currency has still undoubtedly experienced a rise in its global profile over the past year.
Taking effect from August, the International Monetary Fund raised the renminbi's weighting in the currency basket of the Special Drawing Rights — a key international reserve asset also known as SDRs — by 1.36 percentage points to 12.28 percent, reflecting the international community's recognition of the Chinese currency.
"Renminbi internationalization can be the most important driver of building a multipolar international currency system," said Wang Jinbin, a professor of economics at the Renmin University of China and a member of the China Macroeconomy Forum.
In 2023 and the years to come, experts said the renminbi's role as an emerging international currency is expected to gradually rise as China's economic heft increases, thus contributing to building a more balanced international currency system and safeguarding global financial stability.
The necessity of shifting toward a multipolar currency system that is less dependent on the greenback has become more prominent due to the global financial and economic ramifications of the US Federal Reserve's fastest rate hikes since the 1980s, they said.
With the Fed raising interest rates by as many as 425 basis points to tame inflation this year, many economies across the world have felt the pressures of local currency depreciation, capital outflow and higher debt costs. To mitigate these pressures, many chose to raise interest rates, which in turn impeded their economic growth and employment stability.
Even worse, the use of the dollar in financial sanctions has ignited doubts over the safety of holding dollar-denominated assets and using the dollar system for international payments.
Renminbi internationalization, which started in 2009, has met new opportunities as the dollar's credibility is being challenged while aggressive Fed rate hikes intensify global economic recession risks, said Zhang Liqing, director of the Center for International Finance Studies, which is part of the Central University of Finance and Economics.
Other factors favorable to renminbi internationalization include the Regional Comprehensive Economic Partnership pact that has boosted trade between China and other RCEP member states and the emergence of central bank digital currencies, Zhang said while addressing a recent forum held by the center.
"However, there is still a big gap between the renminbi and developed economies' currencies such as the US dollar and the euro," Zhang said. "Challenges remain (in the course of renminbi internationalization)."
Compared with 2016 when the currency was first included in the SDR basket, the renminbi's share in global foreign exchange reserves has risen by about 1.68 percentage points to 2.76 percent as of the third quarter of 2022, ranking fifth worldwide, according to the IMF's Currency Composition of Official Foreign Exchange Reserves database.
Despite the increase, the slice of the renminbi remains small versus traditional international currencies. As of the third quarter, the US dollar took up 59.79 percent in global foreign exchange reserves, the euro accounted for 19.66 percent, the Japanese yen held 5.26 percent and the British pound 4.62 percent, the IMF database showed.
According to Zhang, whether renminbi internationalization can achieve substantial headway still depends on whether China can sustain stable economic growth, provide financial markets with liquid, abundant products, accelerate capital account opening and provide a transparent regulatory environment.
China has declared its commitment to internationalizing its currency. A key report delivered in October at the opening session of the 20th National Congress of the Communist Party of China called for efforts to "promote the internationalization of the renminbi in an orderly way", as part of broader efforts to promote high-standard opening-up.
Echoing the report, the People's Bank of China, the central bank, said it will promote renminbi internationalization in an orderly manner by further expanding the use of the renminbi in cross-border trade and investment, deepening international currency cooperation and developing offshore renminbi markets.
The central bank will also carry out relevant pilots to further liberalize and facilitate cross-border trade and investment and steadily move ahead with the convertibility of the renminbi under the capital account, the PBOC said in its third-quarter monetary policy report, published in November.
Notably, prior to the latest wording of promoting renminbi internationalization "in an orderly way", PBOC described the relevant efforts as moving "stably and prudently".
Wang at the RUC said the wording change indicates that renminbi internationalization may have entered a new phase marked with formulating relevant rules and taking concrete actions, compared with the previous stage of exploring possible approaches and accumulating experiences.
Looking into 2023, Wang said he expects China to advance renminbi internationalization in three key directions: encouraging more renminbi payments and settlements in international trade, expanding financial opening-up to provide overseas investors with more renminbi-denominated assets and strengthening international cooperation under the Belt and Road Initiative.
The share of the renminbi in global payments by value had risen to 2.37 percent in November, up from 2.13 percent a month ago, retaining the currency's ranking as the fifth most active currency, according to financial messaging services provider Swift.
According to Wang, the rising global use of the renminbi will be a win-win for the world and China as it can help create a more balanced and fair international currency system while reducing the cost for China to raise external debt and manage the risks associated with exchange rate fluctuations.
"Ultimately, renminbi internationalization would be a result of market choices and a reflection of China's economic, financial and political influence, making it a long-term trend instead of a short-term phenomenon," Wang added.
Also deeming renminbi internationalization as a multi-year process, Louise Loo, senior economist at British think tank Oxford Economics, said she expects to see further growth in the renminbi offshore bond markets and more bilateral currency swap agreements between the PBOC and other central banks.
As of early October, the PBOC had established local currency swap arrangements, in which a central bank borrows renminbi with its own country's currency as collateral and vice versa, with its counterparts in 40 countries and regions. The swaps can be used in payments of bilateral trade and investment and help maintain exchange rate stability, experts said.
Underlining a relatively stable exchange rate as one of the key supportive factors of renminbi internationalization, experts said they expect the renminbi to keep generally stable with two-way fluctuations in 2023.
Loo said the renminbi might trade around the 7-per-dollar level next year and strengthen moderately as China's economic rebound gathers pace in the second and third quarters.
But the renminbi may still feel some depreciation pressure from the greenback in the near term as the Fed rate hike cycle has yet to end while COVID-19 uncertainties remain in China, she said.
The central parity rate of the onshore renminbi against the US dollar came in at 6.9546 on Tuesday, weakening by about 9.5 percent since the beginning of the year.
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