By Chey Hyoung-kyu
The internationalization of the Chinese currency, the renminbi, which is also known as the yuan, was perhaps the hottest issue for the international monetary system during the first half of the 2010s.
The renminbi rose in rank from 35th in October 2010 to become the world's fourth top global payment currency in September 2015, even overtaking the yen.
However, the renminbi's internationalization has declined somewhat since as its rank has stagnated as an international payment currency, hovering around fifth to seventh in world ranking. The situation has led some observers to claim that the internationalization of the renminbi has ended in failure.
Yet, it is too early to pronounce the death of the renminbi as an international currency. Notably, despite the stagnation in its use by private firms and financial institutions, its use by central banks as a reserve currency has continued to grow, albeit gradually. As a result, the renminbi has obtained the position as the world's fifth reserve currency.
Also, there are some recent events that may help the renminbi's internationalization in coming years. One is the Belt and Road Initiative, which is widely anticipated as being able to encourage the internationalization of the renminbi by raising its use in trade, financing and investment.
The Asian Infrastructure Investment Bank is often viewed as another factor able to boost renminbi internationalization. The inclusion of China in major global equity and bond indices in recent years is another factor anticipated to increase international use of the renminbi. Moreover, China began to use the renminbi as a pricing currency for a few crucial commodities, including oil, iron and gold, albeit only in selective Chinese markets.
In addition, largely in response to U.S. foreign and monetary policies under the Trump administration, more states have expressed a strong intention to reduce their dependence on the U.S. dollar. Nations facing American financial sanctions such as Russia and Iran are working to establish non-dollar international financial networks and to increase the use of international currencies, including the renminbi. European interest in facilitating the internationalization of the euro has also grown significantly.
Given all these recent developments, there is a possibility that the internationalization of the renminbi may rebound sooner or later. Some states are expected to play crucial roles in the future of the renminbi as international money. These include, in the first place, those housing top global financial centers such as the United Kingdom and Singapore.
In addition to these world leaders of finance, I would like to stress that South Korea is also likely to hold a key position, in that the level of renminbi use in the country will likely be an important barometer for the future of the renminbi's international journey.
First, the nation is China's next-door neighbor, and the internationalization of a currency tends to develop from within its neighborhood. Second, while the renminbi is generally expected to become a regional currency in East Asia before evolving into a global currency, South Korea is a key country in the region.
Third, given that South Korea has close economic ties with China, its material gains from using the renminbi can be substantial, a factor that should strengthen South Korea's motivations to use the currency. Fourth, while a country has to first acquire renminbi to use them, South Korea has been running large current account surpluses against China, which provides it with favorable conditions for accumulating the currency. Finally, Seoul has been working to reinforce its political relationship with Beijing over the past few years.
In fact, although South Korea lacks a major global financial center, the nation is the world's fourth-largest renminbi economy after Hong Kong, Britain and Singapore in terms of the volume of cross-border payments settled by the renminbi. Also, the share of the renminbi in South Korea's trade settlements is one of the highest in the world, reaching more than 6 percent for its exports to China in the first quarter of 2019.
If the use of the renminbi does not expand in South Korea, it will not be easy to anticipate the growth of the currency's use in most other regions of the world. In addition, given that South Korea is the world's 12th largest economy, while it is also a close ally of the United States, a sizeable rise in the use of the renminbi in the country may also make its use more attractive to other countries.
China should fully recognize the value of South Korea as a critical stepping stone for the internationalization of the renminbi. How, then, can China help augment the use of the renminbi in South Korea?
As widely indicated, China should further develop and liberalize its financial markets, which will contribute to the enhancement of the convenience of using the renminbi.
Furthermore, China should design policies such that South Korea can have confidence in the country as a reliable economic partner. The growing use of the renminbi in South Korea increases Korea's dependence on the currency, which increases its vulnerability to influence from the currency's issuer, China. Thus, unless it is confident that Beijing will not exercise its leverage over a country that is increasingly dependent on the renminbi, South Korea may be reluctant to significantly increase use of the currency.
As noted earlier, the recent "weaponization" of the U.S. dollar by Washington has fueled foreign discontent with the currency. If Beijing desires success in the internationalization of the renminbi, it should endeavor to reduce "China threats" to foreign countries.
Chey Hyoung-kyu is Associate Professor of International Political Economy at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo. His papers on renminbi internationalization appear in the International Studies Review, New Political Economy, Political Science Quarterly, The World Economy, Asian Survey and China & World Economy.
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| Chey Hyoung-kyu |
The renminbi rose in rank from 35th in October 2010 to become the world's fourth top global payment currency in September 2015, even overtaking the yen.
However, the renminbi's internationalization has declined somewhat since as its rank has stagnated as an international payment currency, hovering around fifth to seventh in world ranking. The situation has led some observers to claim that the internationalization of the renminbi has ended in failure.
Yet, it is too early to pronounce the death of the renminbi as an international currency. Notably, despite the stagnation in its use by private firms and financial institutions, its use by central banks as a reserve currency has continued to grow, albeit gradually. As a result, the renminbi has obtained the position as the world's fifth reserve currency.
Also, there are some recent events that may help the renminbi's internationalization in coming years. One is the Belt and Road Initiative, which is widely anticipated as being able to encourage the internationalization of the renminbi by raising its use in trade, financing and investment.
The Asian Infrastructure Investment Bank is often viewed as another factor able to boost renminbi internationalization. The inclusion of China in major global equity and bond indices in recent years is another factor anticipated to increase international use of the renminbi. Moreover, China began to use the renminbi as a pricing currency for a few crucial commodities, including oil, iron and gold, albeit only in selective Chinese markets.
In addition, largely in response to U.S. foreign and monetary policies under the Trump administration, more states have expressed a strong intention to reduce their dependence on the U.S. dollar. Nations facing American financial sanctions such as Russia and Iran are working to establish non-dollar international financial networks and to increase the use of international currencies, including the renminbi. European interest in facilitating the internationalization of the euro has also grown significantly.
Given all these recent developments, there is a possibility that the internationalization of the renminbi may rebound sooner or later. Some states are expected to play crucial roles in the future of the renminbi as international money. These include, in the first place, those housing top global financial centers such as the United Kingdom and Singapore.
In addition to these world leaders of finance, I would like to stress that South Korea is also likely to hold a key position, in that the level of renminbi use in the country will likely be an important barometer for the future of the renminbi's international journey.
First, the nation is China's next-door neighbor, and the internationalization of a currency tends to develop from within its neighborhood. Second, while the renminbi is generally expected to become a regional currency in East Asia before evolving into a global currency, South Korea is a key country in the region.
Third, given that South Korea has close economic ties with China, its material gains from using the renminbi can be substantial, a factor that should strengthen South Korea's motivations to use the currency. Fourth, while a country has to first acquire renminbi to use them, South Korea has been running large current account surpluses against China, which provides it with favorable conditions for accumulating the currency. Finally, Seoul has been working to reinforce its political relationship with Beijing over the past few years.
In fact, although South Korea lacks a major global financial center, the nation is the world's fourth-largest renminbi economy after Hong Kong, Britain and Singapore in terms of the volume of cross-border payments settled by the renminbi. Also, the share of the renminbi in South Korea's trade settlements is one of the highest in the world, reaching more than 6 percent for its exports to China in the first quarter of 2019.
If the use of the renminbi does not expand in South Korea, it will not be easy to anticipate the growth of the currency's use in most other regions of the world. In addition, given that South Korea is the world's 12th largest economy, while it is also a close ally of the United States, a sizeable rise in the use of the renminbi in the country may also make its use more attractive to other countries.
China should fully recognize the value of South Korea as a critical stepping stone for the internationalization of the renminbi. How, then, can China help augment the use of the renminbi in South Korea?
As widely indicated, China should further develop and liberalize its financial markets, which will contribute to the enhancement of the convenience of using the renminbi.
Furthermore, China should design policies such that South Korea can have confidence in the country as a reliable economic partner. The growing use of the renminbi in South Korea increases Korea's dependence on the currency, which increases its vulnerability to influence from the currency's issuer, China. Thus, unless it is confident that Beijing will not exercise its leverage over a country that is increasingly dependent on the renminbi, South Korea may be reluctant to significantly increase use of the currency.
As noted earlier, the recent "weaponization" of the U.S. dollar by Washington has fueled foreign discontent with the currency. If Beijing desires success in the internationalization of the renminbi, it should endeavor to reduce "China threats" to foreign countries.
Chey Hyoung-kyu is Associate Professor of International Political Economy at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo. His papers on renminbi internationalization appear in the International Studies Review, New Political Economy, Political Science Quarterly, The World Economy, Asian Survey and China & World Economy.
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